Tax Lawyer's Blog

We generally recommend that our self-employed clients incorporate their businesses and hire themselves as employees.

We do this for two reasons:

1. Putting owner/operators on the payroll significantly reduces the chances of future tax problems; and
2. The IRS audits Schedule “C (PDF Download)“  taxpayers much more frequently than it does corporate taxpayers.

But even if you are not incorporated and report the results of your business operations on form Schedule “C” there are things you can do to minimize your chances of audit and maximize your deductions.

Here are 5 things you should do if you file a Schedule “C:”

1. Check Averages for Similar Businesses on BizStats – Every small business owner (whether incorporated or not) should be familiar with this website. It compiles data from millions of taxpayers to arrive at industry averages. These industry averages can be used by taxpayers as a checklist to determine which deductions you may be entitled to claim and as a guide to assess your potential IRS audit exposure. The IRS itself regularly uses the statistics provided on this site.
2. Invest in Quickbooks Accounting Software- We do not get any commission or kickback for recommending Quickbooks. We do so for three reasons: 1) We use it for our own business and, therefore, can impart our expertise in using it to our clients; 2) It is the most widely used accounting software package in the United States; and 3) It’s simple to use, efficient and relatively inexpensive. If you already use another accounting software package and you like it, don’t switch. We have expertise with a variety of accounting software packages because we’ve seen and used most of them.
3. Maintain a Separate Business Bank Account – One of the problems we most often see is the small business taxpayer who uses one account thereby co-mingling his personal and business income and expenditures. This creates an accounting nightmare which, in turn, makes it much more likely that he or she will run afoul of the IRS and/or state tax reporting requirements. If you haven’t already done so, go to your bank and set up a business bank account and use it ONLY for your business transactions.
4. Keep a Daily Business Mileage Log – Most small business owners use their vehicles for business purposes. The IRS allows taxpayers a tax deduction of 58.5 cents for every business mile driven. But you have to be able to back this up. The way you do it is by keeping a daily business mileage log showing where you went, what you went there for and how many miles you traveled to get their and back.
5. Consider Hiring your Children- Unless you are Billy Ray Cyrus, you are probably in a higher tax bracket than your children. Consequently, if you can shift income to them you will be able to save a significant amount of taxes. Children can make copies, write simple letters, organize files and do a number of simple tasks for your business. Instead of giving them their living expenses with after-tax dollars (at a high rate) you can pay them with pre-tax dollars. Of course, if you pay them over a certain amount each year they will have to file a tax return. But this is a good thing because it starts building up their social security funds.

Finally and unfortunately, there are people roaming the underworld who will promise to prepare your Schedule C so that you show losses and, thereby, reduce the tax you have to pay or obtain a larger refund.

It is easy to be hoodwinked by these Gollums because (especially in these difficult economic times) we tend to hear what we want to hear.

And we all want to to hear that we don’t owe taxes!

Hundreds of taxpayers have come to us for help after hiring one of these unscrupulous tax preparers and, rather than receiving a refund check, got an IRS notice saying that their tax return had been selected for audit.

So be very careful when interviewing a prospective tax preparer. If he or she promises to get you a big refund or claims to have special knowledge that other tax preparers do not possess, run like the wind in the other direction.

Preferably to a licensed CPA or Tax Lawyer.

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