A business, hands down, is one of the best way to save on taxes. But, that doesn’t mean that you can simply declare “I have a business” and get thousands of newly found deductions.
First, you must prove that you have a business. You also need to prove that the deductions are ordinary and necessary to the production of income. And, finally, you need to be able to prove that you paid for the expense.
Today I want to talk about the #1 issue that stops home based businesses from getting all the deductions that they should.
They don’t have a legitimate business!
The IRS is looking at nine factors to determine if you really have a business. These Nine Factors are:
(1) You carry on the activity in a businesslike manner;
(2) The time and effort you put into the activity indicate you intend to make it profitable;
(3) You depend on income from the activity for your livelihood;
(4) Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business);
(5) You change your methods of operation in an attempt to improve profitability;
(6) You, or your advisors, have the knowledge needed to carry on the activity as a successful business;
(7) You were successful in making a profit in similar activities in the past;
(8) The activity makes a profit in some years, and how much profit it makes; and
(9) You can expect to make a future profit from the appreciation of the assets used in the activity.