One of the reasons that people don’t start a business is they are intimidated by the tax forms they think they need to fill out. They take one look at the Schedule C and are blown away by the complexity of the form and all the things of which they need to keep track. It looks like a very involved form. Isn’t there an easier way?
Well, there is. The IRS put out Schedule C-EZ to make it easier for smaller businesses to report the activity in their company. You may be able to use this form if your business has certain attributes. Let’s take a look to see if your business would qualify to use this form.
When you first start out, you may not have a lot of expenses, or a lot of income. Hopefully, that will change quickly, especially the amount of income being brought in. If you only had expenses of $5,000 or less, you can use Schedule C-EZ. Just make sure that all of your expenses are included when you make the determination. It is better to be upfront and not use Schedule C-EZ than to lie and face penalties.
Most small businesses use the cash method of accounting. That means that you record your revenue when you get paid by your customers and expenses when you pay them by cash, check or credit card. If your business operates this way, you can use Schedule C-EZ.
If you have started a business that does not have any inventory at any time during the year, you can use Schedule C-EZ. It is unfortunate that the small businesses that make crafts to sell are basically force out of the ability to use the easier form. However, the Schedule C does provide a step by step process to calculate cost of goods sold, which also gives you an idea of the cost of providing your wares.
Hopefully you made money during the year. If your expenses were more than your revenue from your customers, you would have a net loss. If you had a net loss from your business, you cannot use Schedule C-EZ.
If you were the sole owner of your business, and this was the only business you had, you can use Schedule C-EZ. If you had a partner or incorporated, or more than one business, a different form must be used.
Most small businesses operate as one person operations. Some do hire employees to help with the work. Unfortunately, if you have employees, you will have to use Schedule C, as you cannot have employees and use Schedule C-EZ.
To operate your business, you may buy equipment to help with making products or providing services, even if it is just a laptop computer. If you do use equipment, you will take depreciation on this equipment. If you do take depreciation to spread the cost of the equipment over its period of use, thereby using form 4562 – Depreciation and Amortization, you cannot use Schedule C-EZ.
Did you have a home office? If so, you can probably deduct expenses for the business use of your home. If that is the case, and you are eligible and do deduct the cost of a home office, you cannot use Schedule C-EZ.
Most of the time, a small business owner is very involved in running their business. If not, you will be involved in what is termed passive activity, meaning that you not materially participate in the business. This type of activity usually occurs for companies that are involved in real estate rentals and limited partnerships. If you did have this type of business, and you had a loss in a prior year that was unallowable according to IRS instructions or rulings, you cannot use Schedule C-EZ. Check with a CPA to see if your business was a passive activity.
Have you ever tried to use Schedule C-EZ, but found that you could not use the form for various reasons? I’d love to hear about it. Leave me a comment below. Also, if you have any questions, shoot them to me at email@example.com, and I would be happy to answer them. If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.
In accordance with Circular 230 Treasury Department Regulations, I am 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.