Operating a business, especially from your home, often equals excellent tax deductions (from rent to utilities and internet), but don't get caught deducting the cost of your favorite hobby on your Schedule C. This could result in stress and money owed to the big guy upstairs. The I… R… S.
So what questions should you ask yourself to be sure? Here's a list to consider from the oh so powerful and always helpful folks at IRS.gov:
Does your business behave as a business by maintaining complete and accurate books? (This is literally why we exist. If this is an issue you know what to do.)
Does the time and effort put into the activity indicate an intention to make a profit?
Does the taxpayer depend on income from the activity?
If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
Has the taxpayer changed methods of operation to improve profitability?
Does the taxpayer or his/her advisers have the knowledge needed to carry on the activity as a successful business?
Has the taxpayer made a profit in similar activities in the past?
Does the activity make a profit during some years?
Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the business activity?
We’re often asked the question, "Do I have to make a profit?" Well operating at a loss in your business certainly has its tax benefits. (Although cash for business operations and future lending options may suffer.) Yes, the IRS does expect you to generate a profit at least three of the last five tax years, including the current tax year.
If your business is not able to generate a profit three out of five consecutive tax years, then you could gain the interest of the IRS. There’s a chance they may request information to ensure you’re not abusing your business status to receive a tax benefit. What! People do that? Unbelievable, we know. These practices can result in billions of lost tax revenue for the IRS each year.
If you’re one of our clients, there’s no question your business is a business and your books are looking crisp and clean. We’re handling the number stuff, so you don’t have to. You can focus on what you’re good at, being a business owner.