Can Your Business Pass This IRS Test?

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One of the best ways to pay less tax is to have a business. If you’re thinking about starting one, stop thinking! Do it! Start today. 
The sooner your business began, the less taxes you’ll pay. But it’s not quite as easy as saying, “I have a business!” 
If you’re going to take deductions, you have to prove you have a real business. If you don’t have a business, you have a hobby and you can’t take ANY deductions. If you have a hobby and make $1,000 selling items you get NO deductions. The whole $1,000 amount is taxable.  

You want to make sure the IRS sees you as a business. There are 9 factors to the IRS test which break down into 4 main categories.  

IRS Test #1: Do You Run Your Business in a Business-like Manner? 

Category #1: Business-like Manner 

Prove this by having a separate checking account, keeping good records and having a business plan.  A business these days has a website and/or a Facebook page. Depending on the business, you may also have an Instagram page. And, of course, Twitter and Linked-In are important social media outlets as well. The key is to make sure you can prove you are operating your business like a business.  

You also should have regular financial statements that you review. If you’re losing money, you need to show that you’re trying different things to make the business profitable. 
Your business doesn’t have to be profitable yet, you just need to demonstrate that you’re serious about turning it into a successful business.  

IRS Test #2: Do You or Your Advisors Have the Necessary Experience? 

Category #2:  Experience 

The IRS is going to ask if you’ve been successful in a similar business in the past.  If you haven’t, they’re going to ask who your advisor, leader, mentor and/or coach is.  And then they’ll ask you if that person (or persons) has had or is currently having a success in business.   But it doesn’t stop there.  They’ll also ask if you attend classes, webinars, read books or otherwise study about your business. If you continue to learn more about your business and if, as a result, your sales are increasing and/or you’re making more presentations, you have a good case to prove that you have the right advisors.  

IRS Test #3: Do You Put In Sufficient Time and Effort? 

Category #3:  Time and Effort 

A lot of businesses start out as part-time endeavors.  That’s part of the reason why so many people can get involved.  A part-time or side business doesn’t require the full-time commitment of money and time that a regular business does, especially when there is often no source of other income. Bootstrapping, building the business yourself with your resources, can be the safest way to start.  

But that doesn’t mean you can build your business by doing nothing.  Every business needs you to do something.  

The IRS will want to see that you’re putting in the necessary time to build your business.  In the past, they’ve said that 2 days per week and one or two weekends a month was sufficient to prove you were putting in the required time and effort. 

And now we come to the real challenge.   

IRS Test #4: Do You Have a Profit Motive For Your Business? 

Category 4:

Profit If you have a profit in your business, after all legitimate, properly recorded deductions, then the IRS is going to give you a “pass” on this test.  But if you have a loss, then the IRS wants to be convinced that you’re serious.  That’s why they have the first three tests.   But that isn’t enough.  They want to know that: 

1.You’ve had profit in the past from similar businesses,  

2.You have had occasional profit in this business, and/or 

3.You’ve got a clear-cut plan how you will make a profit.   

A business can mean more money in the future and less tax now. It’s the best of all worlds, but you have to make sure the IRS recognizes that you really have a business.  

Got a question on your business? Join our next Wednesday 

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