Do I Have To File A Tax Return For My Sole Proprietorship?

December 18, 2011 by  Filed under: Taxes 

If you are self-employed, how do you know whether you are required to report your self-employment activities to the IRS? This article will answer that question.

By “self-employed”, I’m referring to a person who owns a sole proprietorship rather than a partnership or a corporation. I’m also referring to a person who owns a single-member limited liability company (LLC) but has not chosen to have that LLC taxed as a corporation; instead, the LLC is taxed as a sole proprietorship.

There are three tax rules that may require you to file a Schedule C or Schedule C-EZ on your federal personal income tax return (Form 1040). If any of these rules applies to you, you should file Schedule C or C-EZ.

Rule #1:
You must file Schedule C (or Schedule C-EZ) as part of your federal income tax return if the profit from your self-employment activities is $400 or more. Your profit is calculated on Schedule C or C-EZ and is the difference between your income (aka “sales” or “revenue”) and your expenses (such as advertising, office supplies, vehicle expense, etc). So if you have a profit, and that profit is at least $400, you must file a Schedule C.

Rule #2:
If your gross income is above a certain amount, then you must file a Schedule C or C-EZ regardless of the amount of self-employment profit. The IRS publishes a chart each year that lists the filing requirements for each filing status: single, married filing joint (MFJ), married filing separate (MFS), head of household (HOH), and qualifying widow with dependent child. For each of these filing statuses, there is a certain amount of gross income that triggers the requirement to file a tax return. For example, in 2011 if you are filing MFJ and both spouses are under age 65, you must file a tax return if your gross income is at least $19,000. And for purposes of this filing requirement rule, gross income includes your “sales” or “revenue” amount from Schedule C or C-EZ.

This second rule applies to many sole proprietors who may have less than $400 in Schedule C profit, or who have a loss on Schedule C. So it is critical that you take a close look at this IRS filing requirement chart to make sure you file a return and a Schedule C even if you have a small profit or a loss.

Rule #3:
You may not be required to file a Schedule C but you should do so anyway. Let’s say you have a loss from your small business but your sales were low enough that you are not required to file a tax return. It could be beneficial for you to file a return and report that loss on Schedule C because you can use that loss to offset income in a previous or future year via the Net Operating Loss (NOL) carryback/carryforward rules. These NOL rules can be tricky, so be sure to consult with a tax professional if you need help to sort that out.

Looking for more small business tax deductions? For a free copy of the Special Report “How to Instantly Double Your Small Business Tax Deductions” visit Wayne Davies is author of 3 ebooks on tax reduction strategies for small business owners and the self-employed.

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