The IRS Wants to Know, Are You Running a Business or a Hobby?

Being a small business owner brings with it a whole host of challenges. Not only are you concerned with taking care of your client’s needs, getting paid and paying your vendors. You also have to be concerned with staying compliant with federal and state laws as well as local guidelines. Small business owners, especially sole proprietors, are at an increased risk of audit. The federal government believes that self-employed people are grossly under-reporting their income and over-reporting their expenses. According to the website Tax Help Online, “You might be shocked to learn that 20% of all small business audits involve disallowing deductions because the IRS reclassifies the small business as a hobby under the so-called ‘hobby loss’ rule.” Internal Revenue Code Section 183 (Activities Not Engaged in For Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule”. As a small business owner, it is your responsibility to make sure your business is viewed as a legitimate business in the eyes of the IRS and not a hobby.

Below, I have listed some smart business practices that will not only help you define and grow your business, but will also help you document that you are running a real business and not just performing a hobby.

1) Write a business plan. There are lots of local small business support centers that can help you to put your plan in writing. For example, the Small Business Administration has both local and online resources to assist you.

2) Determine your legal structure (LLC, Partnership, C-Corporation, S-Corporation, Sole-Proprietor).

3) Obtain an Employee Identification Number (EIN) from the IRS.

4) Open a separate bank account for all of your business transactions (deposits and expenses). You need to keep your personal and business transactions separate.

5) Establish a separate line of credit or credit card to use with your business. Put personal expenses on a personal card and put business expenses on a business card.

6) Keep your business documents organized. The National Federation of Independent Business recommends keeping business records and receipts for at least seven years.

7) File completed tax returns on time. This would include all required schedules and signatures. Depending on the type of organization you have, you or your CPA will be filling out forms like 1020, 1065, 1040 Schedule C, 1096, 1099, 940 along with calculating your self-employed tax. I highly recommend finding a local Certified Public Accountant (CPA) that is familiar with your industry to help you determine which forms you will be required to file and making sure they are submitted on time and to the right government office.

8) Hire a support team: A lawyer can help you with your legal structure and a Certified Public Accountant can help you keep your finances in order as well as keeping you compliant with local, state and federal government.

9) Create industry standard business documents and forms to include: logo, letterhead, business cards, and website.

10) Advertise in your local media along with appropriate trade periodicals.

According to IRS document, FS-2008-23, below are some of the questions that the IRS may ask when determining if your business is engaged in for-profit activity. You will need to be prepared to answer these questions and provide documentation.

1) How many hours a week do you work in the business?

2) Do you depend on income from this activity to pay your bills?

3) Do you have the knowledge needed to carry on the activity as a successful business?

4) Have you made profit in similar activities in the past?

5) Does the activity make profit in some years?

6) Do you expect the activity to make a profit in the future?

7) Are there elements of personal pleasure or recreation?

8) Has your business made a profit in 3 of the last 5 years?

According to IRC 183, “If your business activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.” The result is that your business deductions will now become itemized deductions and be limited to your hobby income.

For more information and assistance in helping your company maintain their position as a legitimate business, please contact a local CPA. Each state has its own independent licensing board. If you are located in North Carolina, you can contact the NC CPA Board website and click on their “Licensee search” button to locate a CPA near you. All licensed and active CPAs in North Carolina will be found on this website.

Tips For Starting and Running a Work From Home Online Business

Who wouldn’t want to start and run their own work from home online business? You could work at your own schedule and your own pace, and pick and choose what you do with that business and how you run it. If you want to add different services or products, you could do that. If you want to take away some choices, you could do that as well. Many people appreciate being in charge of their own success and appreciate seeing the fruits of their own labor. But starting a running a work from home online business isn’t as simple as some think, but it’s also not so complicated that you should be hesitant about it. Working on the internet and running a website is something that many people do today and they have a lot of success with it. So let’s look at how you can start and run a work from home online business, and what your options are with this type of endeavor.

If you’re going to sell something through your work from home online business, you may need a tax I.D. number or sales license you get through your state. This is your way of collecting sales tax for sales in your own state. These are very easy to get and usually just cost a few dollars. The state website or clerk’s office where you get this paperwork also explains how you need to collect and report that tax. Many who start and run a work from home online business get this license and it’s very easy to do and keep track of. Of course if you’re not selling a product you may not need such a license.

Some find that a freelance work from home online business is good for them, if they can provide a service to clients. You may be able to become a virtual assistant, which is someone that provides clerical services to clients. This might include data entry, bookkeeping, proofreading, letter writing, scheduling, and so on. There are those who make their own work from home online business in this regard and do very well. Your website should state your rates and the services you perform. Clients need a good way to contact you so of course email is good, and you may want to get a dedicated phone line as well.

Whatever your work from home online business, be sure that you do actually work it. When you sell a product online you need to continue to market that product and promote your site. This means getting links to your site, contacting past clients and customers to entice them back, and adding new products and articles for site content. Many find that multi level marketing is a good work from home online business because it means two streams of income – the sales you generate and the sales generated by those you recruit to work under you. In any event, you can make a good income from home if you work at it!

Importance of Website for Smoothly Running a Business

Head to head contact in commercial world is getting replaced fast with online transactions and thus internet has become the platform for lions share in global business today. Since internet is not constrained by geographical and political boundaries, it becomes much more convenient carrying out business online. Having a website for running and promoting business is quickly turning out to be an indispensable process and web designer designs commercial websites accordingly.

Economic Process

Moreover, online business is economic in terms of saving money, time, and energy. No widespread establishment and space is required to run even a global business smoothly. One can easily run them sitting at the cool comforts of his own home with a couple of desktop and laptop computer with internet connections; the desktop taking care of static and laptop taking care of works on the move. However, achieving such objective needs effective web design and the task related to web development is mostly aimed at designing the web in such manner that it can perform all tasks related to running a business smoothly.

Website Matching with Business

One of the major tasks before any web designer is to see that the web design they form should match the type of business for which they are doing so perfectly. Website will play very important role for

1. Advertising and publicity of the products and services promoted by the company.
2. Contacting the associates and clients over the web for promoting business and communicating with them.
3. Associating with customers and providing them with customer care service and answering their queries creating goodwill and a database of the consumers.

Naturally the requirements for small, medium, and large enterprises would vary from each other and in result the website for business would also vary in their internal designs.

Website for Home Based Business

A website for business is even more important for a home based business. Buying and selling can be conducted on the web. For instance; there are global sites like the E-bay that is the largest online buying and selling platform of all articles on the globe. But for making profit potential customers should be aware of the existence of the enterprise and products and/or services promoted by such enterprise. That is why web design is very important, and since the home based entrepreneur is dependent totally on the online business, even more for him or her.

Importance of Updating and Developing

It is very important that the entrepreneur desiring to make it good online in business should take adequate care of web development and updating of the website for business. Customers will never like outdated or stale information on the site. For example; writing relevant and informative articles and blogs and publishing them on the website is one of the best ways of attracting potential customers to the site. Unless this information is periodically updated, not one is going to like them and traffic movement to the website would decline.

Enhancement of traffic movement to the website can result in converting potential customers into real and loyal ones. Unless the web designer puts in place a simple yet effective web design for the website, neither of the objectives will be accomplished.

A well designed and effective website is the key to promote business online.

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