Mike Gordon on thu 10 feb 05
http://money.cnn.com/2005/01/31/pf/taxes/avoid_audit/index.htm
I ran across this on www.netscapenews.com seeing this article about
tips the IRS uses for audits.
here is an excerpt. Mike Gordon
Hobby losses
If you are holding down a full-time job but are running a side
business, you may be targeted for an audit if your pet project posts a
loss year after year. Schedule C is used to report income or loss from
sole proprietorships, but some businesses are little more than a
cover-up for a loss-producing hobby.
"The code does not permit you to deduct hobby losses," Kent said.
The gentleman farmer that doesn't intend to turn a profit, Kent says,
is an example of a hobbyist. And the IRS agrees.
Even if that hobby generates a few bucks, it may be in your best
interest to stay far, far away from Schedule C because the IRS may not
be satisfied with a modest profit.
Schedule C filers are among the highest audit risk group so be
prepared to justify your claims. Kent advises his clients to draft a
business plan and to enlist expert help, if needed. Also, carefully
record your business expenses and keep them separate from your personal
expenditures. The goal is to present yourself as a professional, not an
amateur.
Home office deductions
If your place of business is also your residence, be careful with that
home office deduction.
"The room has to be used exclusively for business purposes," Kent
stated. "You cannot just have a desk in your living room where you have
a television set."
Have a tape measure handy because the IRS limits that deduction to the
actual space your office occupies. So if your office takes up 200
square feet in a 1,000 square foot apartment, then only 20 percent (200
divided by 1,000) of your total housing expenses are eligible for that
deduction. Your total housing expenses includes any rent or mortgage,
insurance, utilities, and maintenance associated with the residence.
Tyson notes in his book that a home office deduction cannot result in
a loss. The example he uses is that if your business income totals
$6,000, but you have $5,000 in business expenses and $1,500 in home
office costs, that last $500 cannot be deducted from your taxes.
You can, however, carry that deduction over to the next year provided
you have sufficient income.
Jeremy/Bonnie Hellman on fri 11 feb 05
The problem with being scared off by generic articles and IRS "tips" on home
businesses is that sometimes you are legitimately entitled to those
deductions.
By not taking all deductions for which you fully qualify, you are paying
more income tax than you need to.
As a CPA and tax preparer, I'd say that where there might be a question of
whether or not to take a deduction, your experienced tax professional brings
a lot to the table. In addition, your experienced tax professional
already knows the stuff in those articles so you don't have to waste your
time in doing time consuming research and can use your time to produce
income.
When I look at the IRS estimates of the time required to study and prepare
their tax forms, I'm amazed at how quickly the numbers really add up.
Bonnie
Bonnie D. Hellman, CPA
----- Original Message -----
From: "Mike Gordon"
To:
Sent: Thursday, February 10, 2005 1:21 PM
Subject: home business and the RS
> http://money.cnn.com/2005/01/31/pf/taxes/avoid_audit/index.htm
> I ran across this on www.netscapenews.com seeing this article about
> tips the IRS uses for audits.
> here is an excerpt. Mike Gordon
>
> Hobby losses
>
> If you are holding down a full-time job but are running a side
> business, you may be targeted for an audit if your pet project posts a
> loss year after year. Schedule C is used to report income or loss from
> sole proprietorships, but some businesses are little more than a
> cover-up for a loss-producing hobby.
>
> "The code does not permit you to deduct hobby losses," Kent said.
>
> The gentleman farmer that doesn't intend to turn a profit, Kent says,
> is an example of a hobbyist. And the IRS agrees.
>
> Even if that hobby generates a few bucks, it may be in your best
> interest to stay far, far away from Schedule C because the IRS may not
> be satisfied with a modest profit.
>
> Schedule C filers are among the highest audit risk group so be
> prepared to justify your claims. Kent advises his clients to draft a
> business plan and to enlist expert help, if needed. Also, carefully
> record your business expenses and keep them separate from your personal
> expenditures. The goal is to present yourself as a professional, not an
> amateur.
> Home office deductions
>
> If your place of business is also your residence, be careful with that
> home office deduction.
>
> "The room has to be used exclusively for business purposes," Kent
> stated. "You cannot just have a desk in your living room where you have
> a television set."
>
> Have a tape measure handy because the IRS limits that deduction to the
> actual space your office occupies. So if your office takes up 200
> square feet in a 1,000 square foot apartment, then only 20 percent (200
> divided by 1,000) of your total housing expenses are eligible for that
> deduction. Your total housing expenses includes any rent or mortgage,
> insurance, utilities, and maintenance associated with the residence.
>
> Tyson notes in his book that a home office deduction cannot result in
> a loss. The example he uses is that if your business income totals
> $6,000, but you have $5,000 in business expenses and $1,500 in home
> office costs, that last $500 cannot be deducted from your taxes.
>
> You can, however, carry that deduction over to the next year provided
> you have sufficient income.
>
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