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Sch C business is passive activity so no SE tax?

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    #1

    Sch C business is passive activity so no SE tax?

    This is a new one for me: New client brings in last two years returns. She receives a 1099MISC for her medical transcription work for an out of state company (~$30k of payments). Taxable income is around $25k each year. Yet, the Sch C is marked that she "Does not materially participate in this activity." So no SE tax is determined and put on the return. How is that possible? I didn't even know a Sch C could be marked as passive, my software doesn't have a place for me to even mark that box. A look at previous years indicate that this has been done since at least 2007 and of course she is surprised that she owes tax this year, basically the SE tax.

    Can anyone enlighten me as to how a sole proprietor business can be a passive activity? I could sure reduce my own taxes if I can consider my tax work as passive.
    "A man that holds a cat by the tail learns something he can learn no other way." - Mark Twain
    Tags: passive acitivity, sch c, se tax
    #2
    Well, what do you know

    Originally posted by taxmandan View Post
    Can anyone enlighten me as to how a sole proprietor business can be a passive activity? I could sure reduce my own taxes if I can consider my tax work as passive.
    Schedule C passive activity is covered in the instructions for Sch C, page 3, and I confess I had to look cause I thought there was no way myself.

    It sounds like somebody is thinking the "business" she is not materially participating in is that of medical provider. That's not her business at all. She types. Ask her who is doing the typing. Maybe it will make sense to her if you go down the list of seven participation tests for the actual transcribing, not surgery, or whatever the medical provider is doing. On the other hand, her eyes may totally glaze over, and she may fire you on the spot.

    With the reasoning that appears to be going on here, we bookkeepers could all say, "Hey, I don't cut hair, hang siding, change oil, for any of the folks I keep books for. I must not materially participate. Yippee! No SE for me!"

    BTW, love your signature line!
    Last edited by RitaB; 09-26-2012, 10:00 AM.
    If you loan someone $20 and never see them again, it was probably worth it.

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      #3
      Why did she leave her last preparer?

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        #4
        Ah, good question

        Originally posted by Lion View Post
        Why did she leave her last preparer?

        Maybe he is incarcerated.

        But, I think I am leaning toward self-prepared.
        If you loan someone $20 and never see them again, it was probably worth it.

        Comment

          #5
          Originally posted by Lion View Post
          Why did she leave her last preparer?
          They moved several years ago from WA to Orygun, but kept going back to that preparer(an EA in WA) until this year when her fees "skyrocketed" so they looked locally and found my office.

          With regard to the C instructions, she hits on all 7 of the criteria listed in the instructions, any one of which would make it a non-passive business. Which is why I couldn't understand how it was ever considered passive. Oh well, if no one as a Tax Court cite for me I guess I'll just add that SE tax and advise her that the previous years' returns need to be amended.
          "A man that holds a cat by the tail learns something he can learn no other way." - Mark Twain

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            #6
            A Schedule C biz could be passive if, for example, the owner turned all of the running of the business over to employees, and simply took profits. I'm thinking of someone who essentially retired, but did not sell the business. Unusual for this type of entity, especially with all the outfits selling entity formation.

            I'm surprised no CP2000 for the SE tax. Maybe the matching goes as far as looking for it on Sch. C, but doesn't check to see if SE is computed? How long has this been going on?

            Comment

              #7
              Two separate questions

              Can a Schedule C business be a passive activity? Yes, of course ... absentee or otherwise non-participating owner.

              Does SE tax apply anyway? Absolutely!

              It is possible ... likely? ... that the taxpayer received CP2000 or other IRS notices about the SE tax in prior years. In any case you should definitely advise her, in writing, about the SE tax and the failure to pay it in prior years. You can't compel her to file amended returns, but you should certainly prepare her current returns correctly. Since the TP apparently believes she doesn't have to pay SE tax, I recommend that you be sure and tell her, also in writing, that SE tax will be figured and included in any returns you prepare for her. This may serve to head off a dispute when you deliver her returns and she balks at that tax ... and won't pay your bill.

              As for the previous preparer, that's one reason the IRS is now requiring the RTRP process for many.
              Roland Slugg
              "I do what I can."

              Comment

                #8
                Yes

                Originally posted by Roland Slugg View Post
                Can a Schedule C business be a passive activity? Yes, of course ... absentee or otherwise non-participating owner.

                Does SE tax apply anyway? Absolutely!

                Yeah, I missed that earlier. I think it's pretty much that simple. Show the transcriptionist line 2 of Sch SE:


                "2. Net profit or (loss) from Schedule C, line 31; Schedule C-EZ, line 3..."
                If you loan someone $20 and never see them again, it was probably worth it.

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