The solution lies in â€˜profit motiveâ€™
If you want to be in business, you should just announce it. And then, you can amazingly convert your personal expenditure into valid tax deductions. If you wish to manage things as a sole proprietor, that is possible. All you have to do is to decide on a name.
In many states, you have to submit a “DBA” (doing business as) form. This form can be submitted to the clerk of your local county. Fill in the form with nominal particulars, like your name, address and the assumed name which you want to take for doing business. Lets say “John D. King DBA Tax Planning Associates.”
And then comes the best part â€“ you need not make profit to claim your expenses. Important requirement is â€“ you need to have a â€˜profit motiveâ€™. Under the Internal Revenue Code, a if you earn some net income in three out of five years of your business, your â€˜profit motiveâ€™ is proved!
Its a common presumption that your business may not make profit in the initial years. In fact, you can file Form 5213 insisting that IRS should defer challenging the legitimacy of your business in the first five years.
Once again, what you need to show is â€“ â€œprofit motiveâ€ and not actual profit! Courts have allowed in many cases the deduction of business losses in full despite 10 or 20 years of continuous losses. The real test is â€˜honestâ€™ and â€˜actualâ€™ profit motive. If you have a reasonable chance of making a profit, that is sufficient!
Generally the IRS is considering the following factors to find out whether your intentions are good:
The way in which you perform your business functions.
The skills you have and the efforts you have taken for the business in performing these functions.
How much time you spend?
Do you expect your assets in business to appreciate over a period of time?
Have you done similar types of activities in the past?
If yes, then what was the outcome?
Are there any occasional profits (at least)
Your present financial position.
Then comes in the element of pleasure. Its not necessary that you should suffer while doing a business, to make your expenses tax deductible. If you â€˜enjoyâ€™ doing your business, then thatâ€™s more acceptable to allow the deductions, as per many court rulings.
And very important â€“ donâ€™t assume that if you are working somewhere else, you cannot do business. There is no such restriction. Your business may or may not be your primary source of income.
Is your business your hobby?
Remember, your business can be out of your hobby. Suppose photography is your hobby and you start it as a â€˜businessâ€™ by printing cards, other stationery and by running ads. You can demonstrate a profit motive, a desire to make money. You need to keep the receipts, vouchers and a diary of your regular business activities. Then you can use the entire salary of your primary job to deduct your new business expenses. Perhaps you may end up paying zero taxes, or even qualify for Earned Income Credit.
Three primary tests to qualify your expenses as business tax deductions
Yes, home business deductions are 100% legal.
The expenses must be normal and necessary. They should be reasonable and paid or incurred during the year for which return is filed.
You should have proper receipts and vouchers to support your claims.
To sum up, concentrate on your desire to make profits, because what you save in taxes is more important that what you pay!