Are you a sole proprietor who files the
shorter Schedule C-EZ rather than the traditional (and longer) Schedule
C? If so, please read on to find out why you may be making a big
mistake. First, a quick review of the qualifications for using Schedule
C-EZ. You qualify if you meet these criteria:
- Your business expenses are less than
$5,000
- Your business has a profit
- You have no inventory
- You use the cash method of bookkeeping
- You have only one business as a sole proprietor
- You have no employees
- You are not taking the home office deduction
- You're not required to file Form 4562 (the form used to report
deprecation and/or the Section 179 deduction for business equipment and
other 'fixed assets')
Assuming you qualify, should you take
advantage of this shortcut? Will it really make your tax life that much
easier?
Do you notice how much shorter the EZ
form is? It has only eight lines. Schedule C has forty-eight lines.
So, which form would you rather file?
Obviously, the one with only eight lines. And if you are not taking a
vehicle deduction (which gets reported on lines 4-8), you can actually
report all your business activity on only three lines:
Line 1 - Sales
Line 2 - Expenses
Line 3 - Profit (Line 1 minus Line 2)
That's got to be the easiest small
business tax form I've ever seen! You just add up your income, add up
your expenses, do one subtraction calculation, and presto, you are done
with Schedule C-EZ. Next form, please.
If you are trying to simplify your tax
life, this form is for you.
But here's something to think about:
Sure, there's something to be said for
a 3-line business tax form. But I'm here to warn you that you might be
doing yourself a disservice by switching to Schedule C-EZ.
Here are my reasons:
1. If you are filing Schedule C-EZ,
that means you had no business equipment expense and no home office
deduction.
Is that really true? If so, fine. But I
urge you NOT file Schedule C-EZ just to avoid filing Form 4562 (the
business equipment form) and/or Form 8829 (the home office form). These
are two of the best tax breaks offered to the self-employed. You may be
missing out on hundreds or even thousands of dollars in tax savings by
omitting these two forms.
Even if you have to hire a professional
to do your return, the cost is usually well worth it when the tax
savings outweighs the tax prep fees.
2. From a business management
standpoint, are you filing Schedule C-EZ because you abhor doing any
type of detailed analysis of your business' income and expense records?
The regular Schedule C forces you to
perform one of the best financial exercises every business needs:
expense categorization.
There are about twenty different
expense categories on Schedule C. Most successful businesses have at
least that many expense categories - tracking your expenses at this
level of detail keeps your finger on the pulse of your business.
If you think you can run a profitable
business by just lumping everything together into one huge catch-all
expense category, well, I think you are taking a costly and potentially
business-ending shortcut.
You need to know where the money goes.
Failure to categorize expenses can be a symptom of financial laziness -
and could be a sign that your small business is only going to get
smaller and smaller. Before you know it, you won't know how or why, but
you will realize that you are out of business and will be clueless as to
the cause of the failure.
Detailed expense categorization is the
business owner's first line of defense against business failure.
So before you jump on the Schedule C-EZ
bandwagon, take a close look at your bookkeeping system and see if you
need to make some changes. The long-term success of your business may
depend on it.
I challenge you to ask yourself this
question: Is the convenience of a 3-line tax form really worth it? I
think not.
