Okay so converting your personal expenditures into tax deductions?

[Oakenfold]

interesting article Okay after reading this I'm hyped about forming a business but where to start, all this crap they teach in college is all big business nothing small. Where would I look to find out qualifications for licensing a business, or more information on what pro's and con's would be for the personal consumer. I think MSN could only go so far on this article if you get my drift. Looking for ideas and opinions.

 

[vi edit]

It's just my opinion, but that is a very irresponsibly written article. I can just imagine the number of flags that are going to be going off at the IRS department from every Jimbob and Mary Jane that tries to follow the advice of this author.

You have a very small chance of getting audited as an individual, but once you become self employed the chances of it skyrocket. I suggest that you be VERY careful and choose a qualified accountant that can be a representative to you for the IRS in the event that they do audit you.

Be careful.

My $.02

 

[Oakenfold]

Looking for suggestions on making this pc addiction into a tax deduction.

 

[kranky]

Not to rain on your parade, but tax deductions aren't automatically a wonderful thing.

In order to meet the standard that your business has a "profit motive", you'll likely have to spend a lot of money. Even if everything you spend is deductible, that doesn't make it free - it will only save you what the tax would be on that money, probably 28% at best. So 72% of what you spend might be money down the drain in order to save 28%.

And even if you don't spend a lot of money, you'll have to spend a lot of time keeping accurate records and documenting a lot of things. The value of your time should be figured in to the mix.

 

[EagleKeeper]

<< Establishing a ?profit motive? is the key
To be in business, you merely declare it. And by doing so, you can magically turn personal expenses into tax deductions. If you want to operate in a noncorporate format, as an individual proprietorship, but under a different name than your own, no problem. It?s easy.

In some states, you may have to file a ?DBA? (doing business as) form with your local county clerk. Basically, you just fill out a form with your name, address and the assumed name under which you?re doing business. For example, I might be ?Jeff A. Schnepper DBA Super Tax Savings Associates.?

Here?s the best part: Your business doesn?t have to make a profit for your expenses to be deductible. All you have to do is establish a ?profit motive.? Under the Internal Revenue Code, a ?profit motive? is presumed if you earn any net income in any three out of five business years.

It?s recognized and expected that new businesses probably won?t make a profit in the early years. >>

 

[db]

Keep really good records and receipts. Be able to justify everything.

 

[bunker]

FYI, small business/home business get audited the most percentage wise.

 

[Oakenfold]

So is this something that you all have thought about? If so why/why not have you chosen to do so?

 

[kranky]

I believe many people do this with a hobby they already are involved in. If you are buying and selling sportscards (for example) as a hobby, it's pretty easy to decide to make it a business. Just start keeping records, get some business cards, etc. etc. It might not cost very much to make that leap.

Now look at a PC business on the other hand. You are starting with nothing. You have more of a burden to show you have a profit motive - advertising, making sales calls, etc. That takes a lot of time and money, while sportscards is as easy as going to card shows on the weekends. If you don't sell anything, you are still out the money. Sportscards people don't care so much, they are still interested in it as a hobby anyway.

And all that for some deductions which, as I mentioned, only save you the tax on the money. It's not a free ride. And if you do it on a small scale (let's say you don't do sales calls, you just put an ad in the local paper to keep costs down), you aren't going to make a lot of money, and you have the same amount of aggravation as you would if you were wildly successful.

Look at your tax return for last year and figure out what your tax bracket is. Let's say it's 28%. Now, to take an extreme example:
Costs of running the business: Advertising, brochures, mileage, postage, etc: $500
Total sales: $8000
Gross profit on sales: $800
Net profit after deducting costs: $300
Tax on profit: $84
Net profit (the bottom line): $216
Tax savings because of deductions: $140 (if your tax bracket is less than 28%, this number will be smaller)

You earned $216 and saved another $140 because of your deductions. Estimate how many hours you would have had to put in (remember, you have to convince the IRS you have a profit motive, so you can't be a total slacker) and figure out how much an hour you would have made.

You can play with the numbers if you think you'd make more than a 10% gross profit, or you would sell more than $8000, or whatever.

I was a co-owner of a small business for a few years but I didn't have enough time to invest, and my partner and I agreed I'd put up the money and she'd do most of the work. Yes, I got to deduct the losses, but we still lost money. Not a lot, but deductions don't make up for your out-of-pocket losses.