This past week, I heard again and again about two different “ah-ha” moments from Tax Minutes. If you haven’t yet signed to receive these daily 60 second (or less) strategies, you can go to https://www.youtube.com/user/USTaxAId
The most popular topics had to do with a tax strategy for crypto investors called tax harvesting. Crypto owners are in a unique position to take advantage of loophole that is there JUST for them. No other type of investor can take advantage of this.
The other popular topic hits a whole lot more people. I’m not sure why this isn’t #1 because it is vitally important especially for anyone joining an MLM (direct selling, IBO, etc – you know, like Amway), starting an online business or anyone who is making a little bit of money selling things they make on Etsy, eBay or the like.
Let’s break down what the issue used to be and then look at what it is now, under the Trump Tax Plan.
First of all, this is important. I suspect there are a lot of people skating through on this and figuring the IRS won’t come after them.
They are already pulling together audit teams to target this group. One of my clients got dinged with that audit and from what I’m learning the IRS knows that there are bigger fish to fry, but the bigger fish always have people like me working for them. It takes a lot more man hours and experience to try to go up against someone like me and my team. We don’t lose.
But the little audits seem easy, so people don’t think it’s a big deal and besides, the IRS just wants you to fax or mail in paperwork to substantiate a few things. BEWARE! This is where they get you. Once you’ve responded, they will most likely deny the deductions and slap you with the assessment before you even know what hit you. You have 2 or 3 weeks to pay and if you don’t the clock starts ticking on a bank account levy and/or salary garnishment. They can even go so far as to put a tax lien on your house.
BOOM! The hammer falls.
So if you get one of these letters, talk to a tax pro FIRST before you send them a thing. We know what they’re looking for and can help you strategically avoid being a target.
Effective 1/1/2018, you can no longer take a deduction for hobby expenses. In the past, if a venture was considered a hobby by the IRS, you couldn’t create a loss and offset other income. That’s bad enough. Now, if it’s considered a hobby you can’t deduct ANY expenses.
So, let’s say you join an MLM. Your expenses in the first year are $5,000 and your income you made was $1,500. If the IRS called it a hobby, you could offset the expenses against your income prior to 1/1/2018. So you had $3,500 of expenses you couldn’t claim, but at least the $1,500 was tax free.
Not anymore. Now that $1,500 would be taxable. NO deductions allowed against the income you make even though you had plenty of deduction.
The thing is these are very easy audits for the IRS. They might not be huge, but they will pick up a lot.
Their whole goal is to try to prove you have a hobby and not a business. In the past, we had the same goal because we wanted you to get your deductions against other income. Now, it’s become even more critical for you to have a business. And for the IRS, it’s even more critical to prove you don’t.
Look out! The only way to solve this is to have a business in the eyes of the IRS. It’s time to commit. Are you serious about this or not? If you are, you can build an independent financial future. If you aren’t you’ll just end up with some extra tax.
It’s not just MLMs, of course, the same is true for crafters, online businesses start-ups and anyone who is just getting going and hasn’t turned a profit yet.
Tomorrow (Saturday, 5/18/19), we’re going to look more in-depth at what it takes to prove you have a business.