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April 13, 2006
Don't File Your Taxes... without reading this
Here is an article I wrote last year for an online business website... I thought it would be applicable this week.
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One of the few problems that can arise from the HUGE home office deductions available when you start your business is making sure that the IRS views your enterprise as a business and not a hobby. If they classify your business as a hobby, it can mean tens of thousands in lost deductions. How do you ensure that your business is viewed only as a business? Simply put - run it like one! The following criteria has been used in IRS court decisions to determine that a home business is indeed a business and not a hobby.
1 - Business plan and projections - Do not go into this with the goal of "making some more money" or "building a nice residual income." Know what you want - make plans for how you will get there and execute those plans. You business plan should show an overall profit projection. You can predict losses for years if you have documentation showing that it is all part of a master plan that will lead to profits. If you need help with these plans and projections, do not hestitate to call me.
2 - Act in a businesslike manner - This is one of the most important areas looked at by the IRS when determining your intent. Consult with experts on how to conduct your type of business (upline.) Document all these interactions. Train those involved in your organization (downline.) Keep a separate bank account for your business and a separate set of books. Keep a written business plan, income statements, and a balance sheet so that you can prove your intent to make a profit. This is all very simple stuff that can be accomplished in just a few minutes a week. Or better yet, hire out your bookkeeping (another deduction) to a professional accountant.
3 - Your own words can sink you - Making improper statements about your business can sink you when facing the IRS. When talking with friends or family about your business, always refer to it as a business. Never call it "this thing I do on the side." Never say, "I am doing this for the tax savings." It may be true, but keep it to yourself. You are in to make gobs and gobs of money and create a residual stream of income that will give you the time freedom to live your dreams - be proud of it!
4 - Devote time regularly to the activity - Those meetings are more than just a good place to meet like-minded network marketers. They are more than just a place to get the latest scoop on products or offers. They are proof that you are conducting your business as a business. (and deductible) Sometimes it may seem like a pain to go to a meeting, but when the IRS passes over your business to harrass someone else with a home-based hobby - you will be thankful. That also means prospecting. Like everything else, document who you talked to about the business and the results. Create notes about when to follow up with people. Not only will your business grow much faster this way, you will create another piece of IRS-proof armor.
5 - Income from other sources - Although not officially a determining factor in IRS rulings, this one is probably the most important to beginning distributors. If you have a majority of your income from other sources or even a substantial portion of your income from outside of your business, your business will be looked at more closely. Does this mean you have just lost all the deductions? No way! All it means is that early on in your business, you just need to pay more attention to the items on this list. Dot your i's and cross your t's. It is at the early stages that all of the other items on this list are most important.
Don't be scared by the list - be excited! Take your deductions. Enjoy the huge side benefit of having this tremendous home-based business but run it like a business and you will be IRS-proof. These steps are very simple and will help make sure you enjoy years and years of huge deductions while you grow your business.
"Why does a slight tax increase cost you $200 and a substantial tax cut saves you 30 cents?"Chris Doelle
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Posted by CDogg at April 13, 2006 08:28 AM