Question for corporate tax return and COGS?
Question for corporate tax return and COGS?
In a 1120S form, I have 80k in gross, and 70k of which is in COGS (where that 70k is in Cost of Labor within the COGS). The business is a consulting business and that 70k is stated as a outsourced labor consulting fees. Is this a red flag for being audited? And given it's a service business, should I just not even put anything in COGS and spread it all out in deductions and 1099s? What is the advised way to do this?
Answers:
Chosen Answer
champ_85: Since you are in a service business, putting any large amount in COGS will probably raise a red flag. It would be reasonable if you have a small cost in that some service companies have to do some value-added services, but you'll have a hard time justifying roughly 90% if your expenses as COGS. If your total gross is $80k, and your expenses are $70k, I assume there is little if any net profit. Also, as a service business, it does not make sense that you are paying for outsourced labor. A typical consulting firm would have consulting fees as your source of income and sales and marketing plus miscellaneous costs as your expenses. The only advice that I can offer is for you to go to an inexpensive accountant to untangle these unusual business practices. That small cost might save you thousands in the cost of an audit. Best of luck!
2011-01-27 18:11:56
champ_85: Since you are in a service business, putting any large amount in COGS will probably raise a red flag. It would be reasonable if you have a small cost in that some service companies have to do some value-added services, but you'll have a hard time justifying roughly 90% if your expenses as COGS. If your total gross is $80k, and your expenses are $70k, I assume there is little if any net profit. Also, as a service business, it does not make sense that you are paying for outsourced labor. A typical consulting firm would have consulting fees as your source of income and sales and marketing plus miscellaneous costs as your expenses. The only advice that I can offer is for you to go to an inexpensive accountant to untangle these unusual business practices. That small cost might save you thousands in the cost of an audit. Best of luck!
2011-01-27 18:11:56
the tax lady: You don't list consulting labor as COGS.
The work is performed as it's delivered and you certainly aren't putting people on a shelf.
As for 1099-Misc, you need to give yourself a W-2 and seriously review the rules for employees vs contractors.
2011-01-27 23:51:06
2011-01-27 23:51:06