If you are a self-employed individual, you have at your discretion to be flexible when reporting your income and deductions on your tax return. Of course, if you receive 1099s, this income will be reported to the IRS. However, if you receive cash payments or unreported income, it may go unnoticed. Besides, will the IRS really know that you receive those payments last year? Hey, no one is looking – right?
Wrong! Even if you never have been audited or never will, these type of decisions will be certain to catch up with you down the road.
No Profit, No Loan
Stacey Blaine, a loan officer, has witnessed firsthand the ill effects of neglecting to report the correct self-employment profit on the return. “Some individuals assume reporting large amounts of gross income during a taxable year would provide a better chance to obtain a loan, however one close look may also reveal large expenses. This not only reduces the net profit but often results in a denial of the loan request due to a lack of ability to repay,” says Blaine.
Net profit is the amount available after expenses are subtracted from income. For self-employed individuals, net profit is an important number because it represents the amount available for payment of personal and living expenses. Loan officers use that number to determine the individual’s ability to make payments on the requested loan.
Blaine also says, “Keep in mind, certain expenses could be added back to your net profit to increase the amount available to repay the loan, such as depreciation and depletion, which are non-cash deductions. Also, the business use of a home deduction could be added back to the self-employment analysis to boost the net profit reported.”
Not only should loans be a concern for self-employed individuals, but for federal disaster assistance as well. After the wake of a natural disaster, agencies often verify self-employment income utilizing the tax return.
At a time when small business owners need support the most, they often find themselves unable to obtain funding since prior years reveal little to no income reported to the IRS.
Don’t wait until it is too late to begin to report your income. Reporting your income could provide the financing you need to keep your business afloat.
Remember: your choice your future!