How Do I Get My 5 Digit Code Site Irs.Gov The IRS Wants to Know, Are You Running a Business or a Hobby?

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The IRS Wants to Know, Are You Running a Business or a Hobby?

Being a small business owner brings many challenges. You are not only concerned with taking care of your client’s needs, paying and paying your vendors. You must also be concerned with maintaining compliance with federal and state laws as well as local guidelines. Small business owners, especially sole proprietors, have an increased audit risk. The federal government believes that self-employed people grossly underreport their income and overreport their expenses. According to the Tax Help Online website, “You may be surprised to learn that 20% of all small business audits involve disallowance of deductions because the IRS reclassified the small business as a entertainment under the so-called ‘loss of entertainment’ rule.” Internal Revenue Code Section 183 (Activities Not Conducted for Profit) limits the deductions that can be claimed when an activity is not conducted for profit. IRC 183 is sometimes referred to as the “entertainment loss rule”. As a small business owner, it is your responsibility to ensure that your business is viewed as a legitimate business in the eyes of the IRS and not a hobby.

Below, I have listed some smart business practices that will not only help you define and develop your business, but also help you document that you are running a real business and not just doing a entertainment.

1) Write a business plan. There are many local small business support centers that can help you write your plan. For example, the Small Business Administration has local and online resources to help you.

2) Determine your legal structure (LLC, Partnership, C-Corporation, S-Corporation, Sole-Proprietor).

3) Obtain an Employee Identification Number (EIN) from the IRS.

4) Open a separate bank account for all your business transactions (deposits and expenses). You must keep your personal and business transactions separate.

5) Set up a separate line of credit or credit card to use for your business. Put personal expenses on a personal card and put business expenses on a business card.

6) Keep your business documents organized. The National Federation of Independent Business recommends keeping business records and receipts for at least seven years.

7) File the completed tax return on time. This will include all necessary schedules and signatures. Depending on the type of organization you have, you or your CPA will fill out forms such as 1020, 1065, 1040 Schedule C, 1096, 1099, 940 along with calculating your self-employment tax. I highly recommend finding a local Certified Public Accountant (CPA) who is familiar with your industry to help you determine which forms you need to file and ensure they are submitted on time and correctly. government office.

8) Hire a support team: A lawyer can help you with your legal structure and a Certified Public Accountant can help you keep your finances in order as well as maintain your compliance with local, state and federal government.

9) Create industry standard business documents and forms to include: logo, letterhead, business card, and website.

10) Advertise in your local media along with appropriate trade periodicals.

According to the IRS document, FS-2008-23, below are some of the questions the IRS may ask in determining whether your business is engaged in an activity for profit. You must be prepared to answer these questions and provide documentation.

1) How many hours a week do you work in the business?

2) Do you rely on the income from this activity to pay your bills?

3) Do you have the knowledge needed to run the event as a successful business?

4) Have you profited from similar activities in the past?

5) Has the activity been profitable for several years?

6) Do you expect the event to be profitable in the future?

7) Are there elements of personal pleasure or entertainment?

8) Has your business been profitable in 3 of the last 5 years?

According to IRC 183, “If your business activity is not carried on for profit, the allowable deductions cannot exceed the gross receipts for the activity.” The result is that your business deductions will now be itemized deductions and limited to your entertainment income.

For more information and assistance in helping your company maintain its position as a legitimate business, please contact a local CPA. Each state has its own independent licensing board. If you are in North Carolina, you can contact the NC CPA Board website and click on their “License Search” button to find a CPA near you. All licensed and active CPAs in North Carolina can be found on this website.

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