Plenty of work helping small businesses awaits accountants entering the tax industry after passing the CPA examination. According to the IRS, 23 million people filed 2010 tax returns reporting self-employment income. Most of these individuals rely upon professionals to prepare their tax returns.
Sole proprietors and independent contractors are wisely hiring experts to correctly report their self-employment income and take advantage of all legitimate deductions. CPA exam prep addresses many forms related to the activity of an unincorporated business. For example, entrepreneurs may have home offices or depreciation calculations that require distinctive forms.
Complete and accurate tax preparation is especially important to the self-employed. Small businesses are nearly three times more likely to encounter an IRS audit than an incorporated entity. Consequently, entrepreneurs also benefit from advice about the records to retain in the event of an IRS exam. All the tax rules about substantiation of business deductions are covered in CPA examination study guides.
The smallest businesses are not immune to IRS scrutiny. In fact, entities with less than $25,000 of gross receipts are drawing increased attention from the IRS. This is a result of audit histories indicating these operations are particularly prone to understatement of income and errors in reporting deductions. A sound path to avoiding omissions and correctly claiming all eligible expenses is relying upon someone with expertise obtained from certified public accountant training.
The largest concern of IRS examiners is overstated deductions by the self-employed that reduce tax liability unfairly. A recent Tax Court decision illustrates the problem. In the case, a taxpayer filed a Schedule C that reported no income but $14,027 of expenses. The small business loss was applied to the taxpayer’s other income sources to lower the tax calculation. The Court ruled that the taxpayer was not engaged in a business activity with the expectation of profit.
If a legitimate business does exist, the primary issue evaluated in CPA exam study is whether expenses are ordinary and necessary. Entrepreneurs cannot use business entities to claim personal expenditures as business deductions.
In the past, many individuals have established bogus business operations in order to report expenses of a personal nature as tax deductible for business purposes. Those days are long gone as the IRS turns up the heat on this method of tax cheating. Over the years, the government has learned to target anyone with a money-losing Schedule C. Inevitable questions will arise about whether the alleged enterprise has a profit motive involving the owner’s continuous and regular effort.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.