Some great insight on what you need for your business when it comes to the IRS. Go through the list and check off what you have done —or not. Doing this will help you know what is the next step to take with your craft business.
In a recent decision made by the IRS, a woman was disallowed $30,000 in expenses on her tax return because the IRS deemed her candle making business a hobby. The IRS made this determination based on several factors. Unfortunately there are no hard and fast rules on what you must do to be seen as a business in the eyes of the IRS.
The basics; in order to deduct expenses from your business you have to be in business for a profit. The IRS refers to this as profit motive and the burden of proof is on you, the tax payer. Here are a few items the IRS may look at to determine profit motive:
- You operate in a businesslike manner
- You maintain a checking account separate from your personal checking account
- you have business cards and stationary
- you keep financial records and receipts
- you have marketing plans and a written business plan
- you have a business license
- you have registered with the state
- You spend more than just a few hours a week engaging in your business activity.
- You are dependent on the income for your lively hood
- If your company has ever made a profit
- If you have sufficient knowledge to make a profit in the business
If you can show profit 3 out of 5 years you are generally ok and may avoid IRS scrutiny. Again these are just a few ways to legitimize your business. Please speak to your tax professional or attorney for advice specific to your business or contact me with any questions Lindsey Patrick, Accountant and QB Pro Advisor – lindseypatrick1@yahoo.com.
Lindsey Patrick has been assisting entrepreneurs and small businesses with their Bookkeeping and Tax needs since 1999. She is a Certified QuickBooks pro advisor and loves to help small business owners implement and use the software to see exactly where their business is and where it can go. She is married and has two small children.
