Since Schedule C is the primary method through which sole proprietors report their earnings, tax pros catering to clients who own small businesses must be adept in its preparation. It’s a cornerstone of tax compliance for this demographic, requiring attention to detail to accurately reflect the financial activities of the business.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.   

Q: Is it true you can still deduct the cost of goods sold (COGS) related to your hobby if you sell items?

A: Yes, COGS are deductible, but only if the hobby generates income.

Q: Do Uber and Lyft fees belong on Line 10?

A: Yes, commissions and fees withdrawn by ridesharing services from a driver’s payment are deducted on Line 10.

Q: What are “Other Expenses” on Schedule C?

A: Other expenses include items not deductible elsewhere on Schedule C, such as amortization, business startup costs and bad debts.

Q: Should royalties from writing a book be reported on Schedule C?

A: If the taxpayer is a self-employed writer, they report income and expenses on Schedule C. Otherwise, most royalty income is reported on Schedule E.

To learn more about preparing Schedule C for sole proprietors, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial at natptax.com/explore. 

Question: Lina filed Form 990, Return of Organization Exempt From Income Tax, by May 15, 2024, which is the due date for Alley Cats Rescue, a tax-exempt organization filing on a calendar year basis. Shortly after, the Form 990 was returned to her along with IRS Letter 2694C indicating there was information missing from her submission. She immediately called the IRS and found out that when information is missing from the Form or Schedules are omitted, the return is sent back to the filing organization and considered “not timely filed” – hence the letter to spur a correction. When she reviewed her submission, she noticed that she did not include Schedule O (Form 990), Supplemental Information to Form 990 or 990-EZ. Was Lina required to file Schedule O with Form 990?

Answer: Yes, Schedule O is a required attachment for all filers of Form 990, as seen in Part IV, Checklist of Required Schedules, Line 38. It is recommended that the schedule be prepared at the same time as the other sections of the Form 990 so that essential explanations are not inadvertently omitted. The specific use of the form is explained in its instructions: 2023 Schedule O (Form 990).

An incomplete Form 990 is considered not timely filed, and the penalty is $20 a day for each day the return is late, not to exceed lesser of $12,000 or 5% of gross receipts. If annual gross receipts exceed $1,208,500, the penalty jumps to $120/day with the maximum penalty of $60,000 [§6652(c)(1)(A)].

The IRS recommends that the preparer “… return a complete and accurate return within 10 days of the date of the letter to avoid penalties. The date we receive a complete and accurate return is the date we consider your return filed.”

With the IRS resuming its campus collection operations, it is more important than ever for you to be able to help clients who owe back taxes or have a balance due with their 2023 tax return. More and more taxpayers now owe the IRS back taxes and an increasing number of taxpayers are filing with a balance due.

The data

After over four years of pandemic-affected operations, the IRS now has over 24 million taxpayers who owe back taxes. If that number is not startling enough, the number of taxpayers who are not in a collection agreement on their back balances is astonishing. Almost 83% are not in good standing – that is, they are not in any agreement such as an extension to pay, a payment plan, or a hardship agreement such as not collectible status or an offer in compromise. As a result, they face potential IRS collection enforcement through tax liens, levies and passport restrictions.

The increase in tax debtors is not likely to end soon. The number of balance-due 1040 filers has been growing steadily over the past few years. Form W-4 confusion, the growing gig economy workforce and the end of stimulus funds have all provided the perfect storm for many surprised balance-due filers.

The trend does not appear to be ending with the 2023 tax returns, either. In fact, as of March 15, 2024, the number of 2023 tax year Form 1040 balance-due filers is already up 6.9% from last year.

How you can help

To stop the balance-due trend, tax professionals will need to work with their clients to correct payments made to the IRS throughout the year. Correcting withholding and estimated tax obligations can be a year-round task. The Form W-4 has been described as a “mini-tax return” that requires professionals to fine-tune withholding calculations.

When clients owe, it is important to get them into good standing with the IRS. The options to get compliant are payment plans, extensions to pay and the hardship agreements. 88% of all taxpayers select payment plans, most of which are simple to set up online if you owe the IRS less than $50,000. The IRS’s Online Payment Agreement application allows for payment plans up to 72 months for those who owe less than $50,000 (called a “streamlined installment agreement”) and for 180-day extensions to pay (IRS calls extensions to pay a “short-term payment agreement”) for those who owe up to $100,000.

There is also another payment agreement option that started in February 2020, just before the onset of the pandemic: the new full-pay, non-streamlined installment agreement (FP NSIA). The FP NSIA allows a taxpayer to enter into a payment plan when they owe up to $250,000. The IRS allows these taxpayers to pay their balances in monthly payments until the collection statute expires (10 years from the date of assessment). These plans are simple to set up with the IRS and require only a phone call.

If your client is in financial hardship and cannot pay their tax bill, you can consider other ‘ability to pay’ hardship options such as partial pay installment agreements, not collectible status or an offer in compromise. These options require proof of your client’s ability to pay through assets and monthly payments.

It is important to note that tax liens can occur even when you are in an agreement with the IRS. Only a timely extension to pay or streamlined installment agreement can avoid a Notice of Federal Tax Lien. If a taxpayer owes more than $10,000 and enters into a FP NSIA or any of the hardship agreements, the IRS will generally file a tax lien to protect their collection interests.

As IRS campus collection restarts and the IRS enters into “enforcement” mode this summer, it is important to get your clients into good standing with the IRS by executing one of the collection options to make a full payment. Once the client is in an agreement with the IRS, they can avoid dreaded IRS enforcement actions.