IMPORTANT INFO IF YOU USE SCHEDULE C   Notwithstanding the difficult economic times, the Internal Revenue Service appears to be out of touch with the rest of the country.   They simply refuse to believe that a legitimate business can lose money and not be considered a hobby.  If you had a current year Schedule C loss you may be selected for audit. General Accounting Office statistics indicate that if you file a Schedule C you are ten times more likely to be audited (even with a profit). A loss increases the possibility of audit.   If filing on Schedule C, we are suggesting to our clients that you consider becoming an LLC and then electing to become a Corporation. Current discussions in Congress contemplate the lowering of “C” corporation tax rates below current individual rates. Existing tax laws effective after 2012 result in even higher individual rates and loss of exemptions and deductions that may make “C” corporation status desirable. Also by electing “C” status you can select a different year end and relieve the pressure of getting info together during the busy tax filing season. A year end other than December tends to negate the Form 1099 matching process resulting in less inquiries by IRS.   Obviously there is cost. First, you need to file corporate tax returns. And you have to pay reasonable officer salaries and to file payroll tax returns.   A cheap price to pay when lowering the chances of audit of your individual tax return; the likelihood that less taxes will be paid due to lower rates; and potentially saving some social security taxes. You will also protect personal assets from creditors, and if extremely profitable have the ability to adopt very favorable retirement plans.   If for some reason future individual rates become lower than corporate rates the option to select “S” status is available.   One caveat, if you anticipate selling your business within the next 5 years or so you probably should make an “S” election and not a “C” election as the tax savings of the conversion will not offset the negative impact of “double taxation” as attributed to “C” corporations upon sale and liquidation. While losing the potential of tax savings via lower rates, all the other benefits of the conversion remain except choice of year end.   Here is the IRS Guide to Activities Not Engaged In For Profit. Please CONTACT US for more information.