If you are a sole proprietor–a person who runs a business that has not been incorporated—the IRS is targeting you.
If you start a business and do not form an LLC or incorporate, you are a sole proprietor.
IRS form Schedule C is used by sole proprietors to deduct business expenses against business income. The two biggest problems for the IRS are fears that income will be under reported and personal expenses will be written off as business deductions.
In addition, the IRS has found that many schedule C businesses are fictional and reported only to reduce the taxpayers tax liability and/or make the taxpayer eligible for the earned income credit (which translates to FREE MONEY!)
That’s why schedule C is the IRS’ most audited form. Simply having a schedule C in your return results in more scrutiny by the IRS.
That’s reason enough not to have a schedule C in your tax return.
Service businesses, such as hair salons, and repair services along with professionals like doctors, lawyers and insurance agents are IRS targets.
Professionals and people in service businesses should change the way they report their business income and expenses.
This means you should AVOID SCHEDULE C LIKE THE PLAGUE!
Forming an LLC or incorporating your business are both great alternatives.
An S-corporation is an excellent alternative to the taboo schedule C. There are many benefits to forming an S-Corp, mainly the fact that S-Corporations don’t pay self employment tax—the additional 15.3% tax due on the profit from a sole proprietorship or partnership.
When forming an LLC to escape schedule C, you will need other members (partners) in the business since a single member LLC must file schedule C. Another alternative is to file form 8832 (Entity Classification Election) to file as another entity such as a corporation or partnership.
Please consult a tax professional to help you make the right decision regarding your entity choice. You may have extenuating circumstances which may call for a different plan of action.