- Days left
You've started a little enterprise in your garage or spare bedroom. And now it's tax time and you're ready to reduce your taxes by taking a whole bunch of deductions for this "business." Stop right there. You might not be entitled to take those deductions, and if you do, you may be asking for trouble.

Here's the key: Deductions for small businesses are only allowed to be taken when the venture is an actual business. A pyramid scheme is not a business. A "gifting club" is not a business. Making crafts and giving them away is not a business. You get the idea. The rules are fairly straightforward. Directly from the IRS website are the most pertinent points:

  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Does the taxpayer depend on income from the activity?
  • Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
  • Has the taxpayer made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

In general, you must turn a profit in at least three of the five last tax years in order for the IRS to consider your "business" a profit-making activity.

One very common issue with business losses relates to a taxpayer's participation in a multi-level marketing company. Research has shown that more than 90% of people lose money in these ventures, so I think that future of the IRS allowing deductions for these ventures is in question. Be very careful when your recruiter touts the "tax advantages" to getting involved in their scheme.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

Increase your money and finance knowledge from home

How Financial Planners go Grocery Shopping

Learn to shop smart and save.

View Course »

Goal Setting

Want to succeed? Then you need goals!

View Course »

TurboTax Articles

Cities with the Highest Tax Rates

Much ado is made in the press about federal tax brackets, but cities can carry a tax bite of their own. Even if you live in a state that has no income tax, your city may levy a variety of taxes that could eat away the entire benefit of living in an income tax-free state, including property taxes, sales taxes and auto taxes. Consider all the costs before you move to one of these cities, and understand that rates may change based on your family's income level.

Great Ways to Get Charitable Tax Deductions

Generally, when you give money to a charity, you can use the amount of that donation as a deduction on your tax return. However, not all charities qualify as tax-deductible organizations. While there are many types of charities, they must all meet certain criteria to be classified by the IRS as tax-deductible organizations. There are legitimate tax-deductible organizations in many popular categories, such as those listed below.

A Freelancer's Guide to Taxes

Freelancing certainly has its benefits, but it can result in a few complications come tax time. The Internal Revenue Service considers freelancers to be self-employed, so if you earn income as a freelancer you must file your taxes as a business owner. While you can take additional deductions if you are self-employed, you'll also face additional taxes in the form of the self-employment tax. Here are things to consider as a freelancer when filing your taxes.

Tax Deductions for Voluntary Interest Payments on Student Loans

Most taxpayers who pay interest on student loans can take a tax deduction for the expense ? and you can do this regardless of whether you itemize tax deductions on your return. The rules for claiming the deduction are the same whether the interest payments were required or voluntary.

Tax Tips for Uber, Lyft, Sidecar and other Car Sharing Drivers

When you're a driver for a ride-sharing company such as Uber, Lyft, Sidecar, or other car sharing service, the most important thing to understand about your taxes is that you are probably not an employee of Uber, Lyft or Sidecar. Drivers for these companies are usually independent contractors, a fact that has tax implications, both at filing time and year-round.

Add a Comment

*0 / 3000 Character Maximum