Let's face it, if you're selling kitchenware as an excuse to have parties with your friends, you are not operating a business. That's a hobby. However, let's say that you have decided you really want to make a decent living at selling that kitchenware. Let's say you work diligently to expand your selling base outside of your usual acquaintances and onto home and garden shows. Then, you deserve all of the deductions and losses allowed to a business.
Ordinarily, this means showing that you are turning a real profit. According to the IRS, if your activity shows profit three out of the last five years, you are running a business. If it isn't, the IRS will treat it like a hobby. It will disallow all of the expenses you carefully itemized. You will only be allowed to use the deductions listed under IRC 183.
But, what about those people who put their best foot forward to be true entrepreneurs? It's tougher now than ever to create a successful business. How many years have we been looking at these dismal economic statistics?
Sometimes, you can prove to the IRS that you intended to make a profit and prove that you are not just making income from a hobby. This is what lawyer and documentary filmmaker, Lee Storey, did (much to the relief of other independent filmmakers also not making a nickel.)
But, how do you prove something as seemingly intangible as intent? You have to treat your business like...well...a business. How many of these questions can you say "yes" to?
Keep good records. Keep your business goals in mind. And, most of all, keep the American Capitalist mentality of always looking for better ways to turn a profit. If the IRS disallows your deductions come tax time, you'll have some proof to correct their opinion.
If you do wind up owing a hefty tax debt to the IRS and need help paying it off, give my team a call at 888-415-1337 or fill out the submission form for a free consultation. We're A rated with the Better Business Bureau and we'll give you the whole truth on your situation.
Labels: Business Tax