If you're like some taxpayers, you have a pastime that brings in cash but produces a loss after you deduct your expenses.
Example: an amateur boutique owner or stylist, who spends money for inventory and supplies and only occasionally sells a product or service. If you could deduct "hobby" losses on your tax return, you could reduce taxes owed on your salary or other income. Actually, you can deduct your losses, but only if you establish that you are carrying on your pastime with the motive of making a profit. If you can't prove you have a profit motive, the IRS views your activity as a hobby, not as a business. Expenses of a hobby can be deducted only up to the amount of income from the hobby. You can't deduct hobby losses from your salary or other income. You can help establish your profit motive in one of two ways. If you show a profit in three out of five years (two out of seven years for horse activities), the IRS will presume you've got a business and not a hobby. However, you can't simply manipulate deductions and income to create profit years. The other way to demonstrate that you're operating with a profit motive is to conduct your activity in a business-like manner. Get advice from an accountant to assist with keeping accurate books and records. Maintain a separate checking account, advertise your services or products, and get a business phone listing. If you have losses, try to turn your business around by taking classes, consulting with experts, and changing your methods of operation. Be sure you spend enough time at your activity to demonstrate that you're serious about profits. Remember, you don't have to earn a profit, but you must try to do so. If you don't have profits in three out of five years, the burden of proof will be on you to show the IRS that this activity is a business and not a hobby. If you want to turn your hobby into a business, contact us! We can assist you with the IRS requirements. Search Topic: Hobby or Business
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Take time to investigate the business thoroughly.
Don't be too eager. Many people feel they should get into the business and then worry about the problems as they develop. An investigation of all the problem areas may indicate that you shouldn't buy that particular business in the first place. Make sure that the price is not too high. Many small businesses are not profitable enough to give an acceptable return on both the buyer's time and money. If the buyer wants $90,000 per year for working 60 to 70 hours per week and wants a 12 percent return on his $100,000 investment, the business must net $102,000. Analyze the past performance of the business you're thinking of buying to be sure it can satisfy your requirements. If you are willing to take a reduced return on your time and money for the sake of self-employment, do so with your eyes open - know the facts. Ask questions. Most buyers don't ask enough questions or require enough financial history to make an informed decision. Any business worth buying should have kept adequate records. The inability or the unwillingness to provide the proper financial information is an indication that the business may be overpriced. The need for professional assistance when buying a business cannot be overemphasized. Search Topic: Buying A Business Planning to start a business partnership with a friend? Prudence demands looking at the pitfalls - as well as the potential strengths - of such relationships. Here are a few questions to consider.
Search Topic: Partnership Decisions Here's what the banker needs ...
When you apply for a business loan, your request must meet certain basic requirements. Your banker needs to have:
The banker also wants to know:
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