- 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 »

Banking Services 101

Understand your bank's services, and how to get the most from them

View Course »

TurboTax Articles

Employer Sponsored Health Coverage Explained

The Affordable Care Act, also known as Obamacare, is simpler than some people may give it credit for. The basic rule to remember is that everyone must carry Minimum Essential Coverage (MEC) or pay a penalty. Employers with 50 full-time employees or more are obligated to sponsor plans for their workers to help them meet this requirement.

How to Report RSUs or Stock Grants on Your Tax Return

Restricted stock units (RSUs) and stock grants are often used by companies to reward their employees with an investment in the company rather than with cash. As the name implies, RSUs have rules as to when they can be sold. Stock grants often carry restrictions as well. How your stock grant is delivered to you, and whether or not it is vested, are the key factors when determining tax treatment.

What is a Schedule Q Form?

The Internal Revenue Service (IRS) has two very different forms that go by the name Schedule Q. One of them is for people who participate in certain real estate investments; this is known as a Form 1066 Schedule Q. The other Schedule Q deals with employer benefit plans. It?s not something an individual taxpayer would normally have to deal with, though a small business owner might need it.

Incentive Stock Options

Some employers use Incentive Stock Options (ISOs) as a way to attract and retain employees. While ISOs can offer a valuable opportunity to participate in your company's growth and profits, there are tax implications you should be aware of. We'll help you understand ISOs and fill you in on important timetables that affect your tax liability, so you can optimize the value of your ISOs.

Add a Comment

*0 / 3000 Character Maximum