Statistics are showing that the number of home businesses and side businesses has been growing of late as the economy has turned south. In reviewing legal resources from such places as Legalzoom, you will soon discover that tax law is among the most challenging portions of our legal system.
You would be wise to consult with a professional when it’s time for your tax payment, but having information before you meet is also beneficial. To be able to take out your business deductions, you must demonstrate that you actually have a business endeavor. Here are some of the factors that the IRS will look into to determine whether you are just running a hobby business versus a real business.
Hobby Business Versus Business Endeavor
The first thing that you must do is be involved consistently and regularly with the business—check out resources like Legalzoom for a more detailed insight. Its primary purpose must be to pursue profit, though it is not necessary that you make a profit in the first few years or so.
After this, the government will look to the following factors:
- The manner you use to carry out this business and whether it is professional
- The expertise that you have in the business and its development
- Whether you expect the assets used in the business to appreciate or depreciate in value
- Whether you have had success in the past over similar activities and whether you have a history of profits and losses
- The amount of profit that you have made versus the number of years you have been doing this
- The financial status of the business
- How much pleasure you get from this activity with the belief being that the more you enjoy it, the less likely it is an official business
Demonstrating Your Position
It’s essential that you keep good records in this matter. Be sure to keep all of your receipts and consider your write offs carefully. You are more likely to be scrutinized if you take excessive write offs without making a profit, and you do not want to be visited for an IRS auditor.
If you cannot keep physical records, at least scan all of your receipts, meeting notes, and the like so that you have virtual copies available. Then make sure that you back it off in a separate place to make sure that they don’t get lost.