honoluluadvertiser.com

Sponsored by:

Comment, blog & share photos

Log in | Become a member
The Honolulu Advertiser
Posted on: Wednesday, September 29, 2004

Simpler tax form applies to more of smallest businesses

By Joyce M. Rosenberg
Associated Press

NEW YORK — The Internal Revenue Service is making it easier for the smallest of businesses to file their income tax returns, allowing more of them to use the very simple form known as Schedule C-EZ.

The restrictions

Tips for small businesses considering filing their tax returns using the Internal Revenue Service's simplified Schedule C-EZ:

The IRS has increased the threshold for reported expenses. Previously, a company could use the C-EZ form if it had $2,500 or less in expenses. That has been doubled to $5,000.

Only businesses reporting a profit can use the C-EZ form. Those reporting a loss must use the regular Schedule C, even if their expenses are under $5,000.

The C-EZ form is intended only for sole proprietors. Companies cannot use the form if they have employees, inventories of goods, or if they are required to file Form 4562, which covers expenses for depreciation and amortization of property.

Using C-EZ makes reporting easier, but business owners still need to do some of the calculations required for some expenses, such as deductions for business meals and entertainment.

Whether a small business must use the regular Schedule C or can use C-EZ depends on the amount of expenses it reports to the government. Until now a company could use C-EZ if it had $2,500 or less in expenses. That threshold is doubled to $5,000.

The agency estimates that 500,000 more small businesses will be able to use C-EZ, which requires a company to report

its gross receipts and total expenses. The only expenses that need to be itemized are those for business use of a vehicle. All other expenses, such as insurance, interest, office expenses, rent, and travel and entertainment can be lumped together.

C-EZ, like Schedule C, is only for use by a sole proprietor. And C-EZ is only to be used by business owners reporting a profit. For a loss, use the regular Schedule C, even if your expenses are under $5,000.

You cannot use C-EZ if you are deducting expenses for using part of your home for business purposes. (In that case, not only are you required to use Schedule C, you must also file Form 8829, Expenses for Business Use of Your Home.)

And, you cannot use C-EZ if you run more than one business as a sole proprietor, if you have inventory, if you have employees or if you're required to file Form 4562, which covers expenses for depreciation and amortization of property.

Many small-business owners will welcome the change, but accountants say there might be reasons to stick with Schedule C.

Bart Fooden, a certified public accountant in Woodbury, N.Y., said the fuller disclosure of Schedule C can be more useful for business owners who are seeking a bank loan and are required to supply their tax returns. "They're more used to seeing that," Fooden said of bank officers and Schedule C.

Using C-EZ makes reporting easier, but business owners still need to do some of the calculations required for some expenses. For example, you can deduct only half of what you spend on business meals and entertainment, no matter which form you use. (You might need to refer to the instructions for Schedule C, which are more comprehensive than C-EZ instructions on the back of the short form.)

Also, if you give a gift to an employee or vendor, the limit of $25 per year per recipient still applies.

Many accountants believe that C-EZ is less likely to be scrutinized by the IRS than Schedule C would be, the IRS suspects that an owner hasn't reported all income.