I had a question from a client, “I started a business last year but had expenses only and didn’t really start making money till this year. Can I just use the expenses starting this year and start the business this year? My losses if applied for last year wouldn’t help me since my tax liability is already zero.”
My answer is that if you started the business in 2008, you need to show the expenses on your 2008 1040 and on a Schedule C. You had planned on starting the business in 2008 and you should take the expenses. Now, if you bought the items for yourself and then officially start the business in 2009, you can show that the items were being drafted into service for business and you can start depreciation then as well, etc.
Reminders of course, you need to show that you are making money and do what you can to avoid running the business as a hobby. When it comes to the IRS trying to determine if something is a hobby vs business, make sure that you carry yourself as a professional, watch spending and do what you can to improve your business.
Keep good records and don’t forget that you are liable for both sides of social security and self-employment tax.
I talk extensivelyabout Hobby Vs Business in my book, Good Tax Idea, Bad Tax Idea. The IRS is scrutinizing Schedule C returns very closely because, let’s face it, people have abused them over the years. There have been a lot of bad ideas in the form of starting a business for the purpose of losing money to just claim expenses, starting a gig to justify spending money on personal things and just plain bad advice. The US government needs money and they will be looking to the IRS to help generate more revenue by looking at things that are abusive.
The flip side is that if you run your business professionally and are in it for making money and do make money, you will be okay. In case you may not have read some of my other stuff on taxes, I love paying taxes on income because that shows that I am making money. Granted, I don’t think some of the tax brackets may be fair but that is coming under scrutiny and a lot of people are hurting and out of work. The IRS consists of human beings and they do work with people to help them. I also like driving on paved highways, having giant hydroelectric dams that work and other public works that are built from Federal taxes.
I am not a fan of corporate Federal tax abuse but then again, neither is the IRS. In fact, the IRS works very hard in trying to get companies to get their act together and they succeed in collecting back taxes and penalties. Just remember that the larger companies have more resources to stonewall the IRS than the average person so it is sometimes easier to go after the little guy or gal. So the take away from all this is that if you are in business, run it as best as you can and don’t forget to put aside some money to pay your taxes with.
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Kim Isaac Greenblatt
Schedule C Impact of Prior Year Purchases
Tags: Business, hobby vs business, taxes