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IRS Form 1040 Schedule C CPA offers tax preparation tips | small business CPA

IRS Form 1040 Schedule C CPA

We don’t think your Schedule C company is small business. (910) 399-2705.

Schedule C CPAs provide more service during tax preparation for your small business than you might think. I’ll give you tips about Schedule C, where to go for help, and where not to go if you have problems.  We’ve got a virtual office to help you with Schedule C wherever you live.  First, here’s what we bring to the table as CPAs:

  • We’ll look for what is on Schedule C, but shouldn’t be.  Probably what you’d expect from a CPA tax preparer – avoiding IRS red flags.
  • We also look for what isn’t there but should be.  Have you missed legitimate deductions?
  • Internal Benchmarking:  Will your Schedule C make financial sense to the IRS? Other types of tax returns have a Balance Sheet component that helps with benchmarking.
  • We’ll review prior returns to get a feel for your business and look for missed tax opportunities.
  • Proactive tax positioning and strategic tax planning to save on future taxes.
  • Managerial implications of your bookkeeping.  You shouldn’t just use your accounting data for Schedule C tax preparation.
  • We’ll monitor your Schedule C business to see if becoming a LLC or subchapter S Corporation makes sense.
  • When we finish, your tax documentation is organized such that you don’t have to recreate Schedule C’s figures if you’re audited.

Documentation for IRS Form 1040 Schedule C – don’t guesstimate or use round numbers

The IRS states it audits a disproportionately high number of Schedule C tax returns.  My guess is that this is secondary to some Schedule C filers keeping poor records.  Maybe because the business is small and the sole proprietor can track all the info in their head.  So when preparering Schedule C, they use some estimates.  In my experience, these estimates are low. There’s a notorious Tax Court case where the IRS audited the mileage claimed on a Schedule C business. The taxpayer estimated the business mileage. The IRS disallowed the deduction and then refused to allow any mileage deduction despite there being some legitimate mileage. Don’t estimate.

Save your documentation. IRS tax audits of Schedule C sometimes go back years. Why are they slow? Who knows?

“Keeping good records for Schedule C tax preparation usually saves tax expense, as opposed to guesstimating.  Plus folks tend to estimate low!”
– Gary Bode, Schedule C CPA and small business tax accountant

Schedule C Expense Categorization

The IRS is big on expense categorization on Form 1040, Schedule C.  So, let’s say you have $50,000 of legitimate deductions in 2013.

  • The IRS can  internally audit Schedule C and compare it to other sole proprietorships, especially if you E File (because you’ve essentially done their data input for them).
  • Even though all $50,000 is legitimate expense, it could raise red flags if you don’t categorize it properly for Schedule C.
  • That doesn’t mean you can’t setup your QuickBooks or Excel spreadsheets with categories that make more sense to you.
  • But when preparing Schedule C you may have to reallocate per IRS Schedule preferences.
  • The Schedule C expense categories don’t cover everything.
  • I think most Schedule C CPAs use additional tax expense categories. Why? It makes Schedule C more realistic.

“Mis categorization of expenses raises potential red flags with the IRS, and perhaps loses the managerial insight that accurate information renders.”
– Gary Bode, Schedule C CPA and small business tax accountant

Schedule C Income

Remember the IRS receives copies of Form 1099-MISC and 1099-K which helps them cross correlate your Schedule C income. I’ve seen Schedule C companies be refused credit at crucial junctures becasue their income is too low. Public Corporations lie to increase income. Don’t skim. It comes back to bite you sometimes.

Shoeboxes and Excel

Not every Schedule C business needs QuickBooks bookkeeping.  Excel is a great program for categorizing receipts if you don’t have a bookkeeping or accounting software package like QuickBooks.  Just set up the tabs as categories!

Where to go for help

  • The IRS posts publications on their website.  Sort of in English (wink).  You can call them too.  But remember you can’t rely on oral IRS information as a defense against bad Schedule C tax preparation.  Try to get their advice in writing.
  • The IRS publishes Audit Guide Techniques. I think most Schedule C CPAs read these to retro-engineer a defendable Schedule C against IRS audit.
  • The big chains like Liberty Tax, H&R Block and Jackson Hewitt have online programs.  As does QuickBooks with TurboTax.  All these folks have good software.  Look for an interview module that walks you through the prep.  Look for a program that makes you pay only when you file.  While fees are cheaper online than going to their retail outlets, be aware of pricing issues.
  • The Internet is full of small business advice. It pays to do your homework.
  • IRS Form 1040 Schedule C has pitfalls. Our firm routinely prepares Schedule C. Give us a call if you need a gree phone consult. (910) 399-2705.

Where not to go for Help

Tax chains are often more expensive than we are.  Hard to believe, I know. You get their same software online, and without being too catty, the ability of their tax preparer may not be greater than your own.  So we don’t recommend Schedule C tax preparation at the big chains, but we do think their online software is appropriate for some Schedule C filers.


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