You’ve made it through the first year of your business, and have survived the holidays (even Valentine’s Day!). And it looks like the IRS has gotten all their forms together and is ready to start issuing refund checks (so you hope anyway). Now you are ready to start preparing your tax return. As you know, you will have to prepare a Schedule C along with your 1040. But you heard something about a Schedule C-EZ. Can you prepare that instead?
The answer to that question, much to your disappointment, is maybe. There is a set of questions you have to answer to determine if you can use Schedule C-EZ. You have to answer “Yes” to EVERY ONE of these questions in order to be able to use Schedule C-EZ.
- For the year, did you have business expenses of $5,000 or less? I know, you can’t know the answer to that for sure until you fill out the form, but Outright does have reports you can run that will let you know if you are even close to this threshold. If you are a slight bit over, talk to a CPA (like the author of this article) to see if there is something that can do.
- Did you use the cash method of accounting? This one is pretty straight forward, as most small businesses are on the cash method to begin with. This basically means you recognize a sale when you get cash in hand, and record expenses when you pay the bill
- Did you not have any inventory at any time during the year? As an Outright customer, this might be the question that is the one that determines that you can’t use the Schedule C-EZ. A lot of our customers are crafters or online re-sellers, and would therefore keep inventory.
- Did you have a net profit from your business? This one is like question one, you can’t know for sure until you fill out the form. However, you can run reports in Outright that show your profit. If it turns out you have a loss, but not by much, you can show these reports to an accountant to determine what you can do.
- Did you have only one business as either a sole proprietor, qualified joint venture, or statutory employee? In other words, serial entrepreneurs need not apply. However, if you only have this one business, you may be able to use Schedule C-EZ.
- Did you not have any employees during the year? Having employees would disqualify you. However, you may have contractors that did work for you. Just be sure you don’t run afoul of the IRS rules regarding the contractor vs. employee question.
- Do you not have any depreciation or amortization this year? If you had equipment during the year, you get to take a deduction over the useful life of the equipment. If you have this deduction, you cannot use Schedule C-EZ.
- Do not deduct expenses for business use of your home? So if you have a home office, you can’t use the form. However, check with an accountant for the rules on whether your “home office” qualifies under IRS rules before you determine whether you can use Schedule C-EZ.
- Did you not have any unallowed passive activity losses from this business in a prior year? Basically, this means that you were an active participant in the business in prior years. However, if you were not actively involved in the business in the past, and the business filed a return that had some losses that the IRS looked at and said the business could not take these losses, then you will not be able to file Schedule C-EZ.
One of the basics of filing tax returns is to use the correct form. Under certain circumstances, you may be able to fill out the much simpler Schedule C-EZ instead of the Schedule C. Look at the questions above to see if you can fill out the shorter form. If you have any further questions, contact a good accountant who can walk you through the right steps to take.
In accordance with Circular 230 Treasury Department Regulations, we are required to advise you that any tax advice contained in this article may not be relied upon to avoid penalties under the Internal Revenue Code. If you are interested in a written opinion that can be relied upon to prevent the imposition of tax-related penalties, please contact the author.
The author, Chris Peden, CPA, CMA, CFM, has over 15 years of experience with helping people and companies with organizing and making sense of their finance information, as well as meeting their regulatory compliance requirements. He is also available as a freelance blogger if you need an article on finance, accounting or taxes for your blog. He can be reached at email@example.com, and you can view his website and blog at http://cmpfinancialconsulting.homestead.com/.