TaxTalk
Do You Own More Than One Business In The Eyes Of The IRS?

People endowed with an entrepreneurial spirit generally don’t limit their efforts to one business activity. It’s common for business owners to branch out into sideline activities that may or may not be related to their original enterprise, and that might be considered a separate business.

For example, a craft supply retailer might also offer classes in various types of arts and crafts. Or a photography studio might offer photo-processing of customers’ ordinary snapshots in addition to traditional photography. In each case, the question arises: Is this a single business or two businesses that should be reported on two different Schedule Cs?
Quick Tips
The tax laws and regulations are not clear on this issue, probably because the facts and circumstances can vary so much from case to case. Generally speaking, if you have two or more separate business activities, you can’t report them on the same Schedule C. In determining whether you are engaged in more than one activity, you must consider all of the following:
  • The similarity of the activities
  • The business purpose that is (or might be) served by carrying on the activities separately or together in a trade or business or investment setting
  • The organizational and economic relationship of the activities

These factors are quite vague and subjective, even for the IRS. The general idea, however, is that if you provide similar products or services to similar clients, you have a single business. If you don’t, you may have more than one business, depending on how close the relationship is between the activities.

Two other factors that should be considered include:

  • Which spouse is the primary operator of the business; for instance, does one spouse run one activity while the other runs a second?
  • The locations of the businesses; if you have two different but related businesses that occupy two separate sites, it’s more likely that they should be considered two separate businesses

If you receive income as a “statutory employee,” a grouping that includes full-time life insurance agents, agent or commission drivers, commission traveling salespersons, and certain homeworkers, you must report this income on schedule C. If you also receive other income as a self-employed person, don’t combine the two types of income—you must file a Schedule C for each type.

One last factor to keep in mind is that the tax law provides for separate treatment of “passive activities”—basically, income or losses from a passive activity can only be offset by income or losses from other passive activities.

Real estate rentals are most often classified as passive activities, which must be reported on Schedule E, Supplemental Income and Loss, not on Schedule C. So, if your “sole proprietorship” involves some rental or leasing activities, you may need to treat the income and expense from these activities as separate passive activities.

Reprinted with permission from CCH Business Owner’s Toolkit Tax Guide 2000 (CCH INCORPORATED, 1999), by Susan M. Jacksack, J.D., www. toolkit.cch.com.)

Can You Use Form C-EZ?
The IRS offers a simplified version of Schedule C, known as Schedule C-EZ. You are eligible to use Schedule C-EZ if you:

  • Operated only one sole proprietorship during the business year
  • Did not have an inventory at any time during the year
  • Did not have employees during the year
  • Had total business expenses that did not exceed $2,500
  • Do not deduct expenses for business use of your home
  • Use a cash method of accounting
  • Did not have a net loss
  • Do not have a prior-year unallowed passive activity losses for this business
  • Are not required to file a Form 4562, Depreciation and Amortization, for the year. This means you did not place any depreciable property into service for the first time this year, and you’re not claiming depreciation on any “listed property” such as a car, light truck, motorcycle, cell phone or computer