Erickson, Brown & Kloster, P.C. Newsletter for Thursday, November 05, 2020
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Filing Responsibilities With Income or Loss From Business

 

Even if you're doing a little freelance work from a home office, you're technically running a business and have some new tax responsibilities that you didn't have working entirely for wages. One of those requirements is filing Schedule C, which is used to report income or loss from a business you operated as a sole proprietor. An activity qualifies as a business if your primary purpose for engaging is for income or profit and you're involved with continuity and regularity.

A sole proprietorship is the simplest form for running a business, and is appropriate for many freelancers — those working in the gig economy. Your main filing requirement is Schedule C, part of the Form 1040 you would likely be filing anyway. Although the form may change from year to year, and tax laws and regulations also change, it's essential you keep exact records of money you earn and money you spend, because Schedule C has a lot of data requirements, as noted below:

Part I: Income. You enter, among other figures, gross receipts and sales, to calculate your gross income.

Part II: Expenses. These include everything from advertising to car use, and from relevant mortgage expenses to travel. You'll see about 20 categories here. Using numbers from Part I, you'll calculate whether you have a profit or loss.

Parts III-V: Cost of Goods Sold, Vehicle, and Other Expenses. As the IRS notes, "if you engaged in a trade or business in which the production, purchase, or sale of merchandise was an income-producing factor, you must take inventories into account at the beginning and end of your tax year." These sections may not be necessary for all taxpayers, but for those who have to fill these out, it can get complicated.

Getting ready for tax time

When it's time to make your annual visit to your accountant, there are a number of tasks you can do in advance to make sure preparing Schedule C goes as smoothly as possible:

  • Take stock of your workspace in your home. Home office deductions are complicated and strictly limited, but by keeping track of the space you use for work, you can help ensure you get the deduction.
  • List, by category, your expenses.
  • Keep a record of your income. If you have multiple clients and customers, take advantage of a simple invoicing program, which can give you a yearly total in a clean format.
  • Pay quarterly estimated taxes as necessary. This may depend on how much you're earning. Talk to your accountant about whether you need to be making quarterly payments, and how much they need to be.

Have you recently started a business? Give us a call and we'll help you prepare for tax filings to make sure you're all set for the April 15 deadline.

 
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Erickson, Brown & Kloster, P.C.
Erickson, Brown & Kloster P.C.
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Phone: (719) 531-0445
info@ebkcpa.com
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4565 Hilton Parkway Suite 101
Colorado Springs, CO 80907
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Any accounting, business, or tax advice contained in this communication, including attachments, is not intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, Erickson, Brown & Kloster, P.C. would be pleased to perform the requisite research and provide you with a detailed analysis
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