Tax Issues 3
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Are there any benefits from reporting part-time self-employment income as business income?
Yes. Here are several:
- Almost all ordinary and necessary business expenses are fully deductible on Schedule C. If you use Schedule C-EZ you can deduct up to $2,500 in business expenses. The same expenses, if reported as a miscellaneous deduction on Form 1040, Schedule A, are subjected to the 2 percent floor on miscellaneous expenses, which means they are only deductible to the extent that they exceed 2 percent of adjusted gross income (AGI). .
- If you are running a business and your expenses exceed your income, you can use the loss to offset other income if you use Schedule C. (You can't use Schedule C-EZ if you are reporting a business loss.). If you don't file a business return, deductions for expenses for hobbies or other income-producing activities will be limited to the amount of income from the activity. .
- If you report income on Schedule C and have a room that qualifies as a home office, you may be able to take a substantial home office deduction. The IRS does not allow a home office deduction if what you do is termed a hobby. .
- Interest on personal loans is not deductible, however interest on business loans is deductible. Thus, if you borrow money to buy a computer for your home business you can deduct the interest on the loan on Schedule C prorated to your business use of the computer. You could not deduct the interest on a personal loan for a computer to use in conjunction with your hobby. If that same computer were used more than 50 percent for business, you could also expense or depreciate the cost. (See "Can I deduct the cost of my home computer and cell phone?") .
Who should use Schedule C-EZ?
Schedule C_EZ is aimed at those who have few business deductions and a limited amount of income from a small business. To use this schedule to calculate your taxes you may have no more than $2,500 in business expenses for the year. In addition, you cannot use the form if you take the home office deduction, show a loss for the year, have more than one business that you run as a sole proprietor, have employees, have to File Form 4562 (for depreciation and amortization expenses), or have unallowed passive activity losses from the business from a previous year. Having inventory at any time during the year also disqualifies you from using Schedule C_ EZ.
Can I have a full,time job working for someone else and file a business return, too?
Yes. If your income-producing activity qualifies as a business, you can file a Schedule C return even if you have a part-time or full-time job working as an employee in another business.
Do I have to have a separate business checkbook to file a business return?
The IRS doesn't require you to have a separate business checking or savings account to file either a Schedule C or a Schedule C_EZ. However, having a separate business account will simplify record keeping for you and help prove your business
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