The Cost Of Small Businesses Essay example

1158 Words Nov 9th, 2015 5 Pages
8. Claiming Large Losses from Self-Employment
If you file a Schedule C to claim self-employment income, understand that you could increase your risk of triggering an audit. Small businesses, especially those that involve earning cash payments and have no unique business identifiers other than a taxpayer 's name, are among the favorite targets of the IRS DIF system and its staff of auditors. If self-employed, consider forming a limited liability company (LLC) or corporation because they 're audited less frequently than sole proprietorships. The tax advantages include qualifying for more deductions and being able to hire family members and offer them tax-advantaged benefits that legitimately reduce your tax burden.

Other IRS Red Flags to Consider
Depending on your age, family size, neighborhood and business affiliation, earning too little income when compared with other people in your demographic group could trigger an audit. It might be shocking, but you can be audited for not making enough money. For example, suppose that you report $40,000 in income for your business. IRS computers determine that it takes $60,000 to pay the bills in your ZIP code for a similarly sized family. IRS computers don 't take into account a frugal lifestyle, nontaxable resources like child support or help from family members.

Other potential red flags that could trigger an audit include:

Claiming the Earned Income Credit
Taxpayers often get back more than they earn with this credit, so the IRS…

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