About.com Business Law / Taxes: U.S.

Profit-making Business or Hobby? What the IRS Looks For

Mon, 23 Nov 2009 06:54:43 +0000

You just retired, kind of, and you figure now is the time to put your creative talents to use and maybe sell some of your crafts.� Or maybe you were just laid off and you are interested in starting your own business so you can get out of the syndrome.� This second scenario is what my husband's nephew just experienced.� He just got laid off for the third time from a big bank.� He said he's tired of the roller coaster and he wants to start his own business selling his woodworking crafts. He asked one of the most common questions I get, "Do I have to make a profit so the IRS won't call my business a hobby?"

What the IRS looks for

The IRS says, "An activity is presumed for profit if it makes a profit in at least three of the last five tax years."� But what if you don't make a profit?� My business didn't make a profit for five years.� But my business met other IRS requirements to keep it from being considered a hobby.� First, it was not the kind of business that is typically thought of as a hobby (consulting and selling e-books).� Second, I did all the things a real business must do to show it was not a hobby.� If your business could be considered a hobby (a craft business like the one above), ask yourself these questions (the ones the IRS will ask):

Does the time and effort put into the activity indicate an intention to make a profit?
Do you depend on income from the activity?
If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
Have you changed methods of operation to improve profitability?
Do you have the knowledge needed to carry on the activity as a successful business?
Have you made a profit in similar activities in the past?
Does the activity make a profit in some years?
Do you expect to make a profit in the future from the appreciation of assets used in the activity?

Legitimate Business Activities
If you want your business to be considered legitimate, you must act like a real business:

Keep excellent records showing income and expenses
Perform marketing and sales activities to attract and keep customers
Pay sales taxes and other federal, state, and local taxes
Set up as a limited liability company or corporation, rather than as a sole proprietor

I can't guarantee that the IRS won't still look at your business as a hobby even if you do these things, but these activities can give you more credibility with the IRS.� Remember, I'm not a CPA or tax attorney.� I am just presenting general information to think about and discuss with your tax adviser.

For More Information:

IRS on "Hobby Loss" Rules
Simple Business Start-up

Profit-making Business or Hobby? What the IRS Looks For originally appeared on About.com Business Law / Taxes: U.S. on Monday, November 23rd, 2009 at 06:54:43.

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First Steps to Business Start-up

Sat, 21 Nov 2009 06:49:26 +0000

Someone asked me to list all of this week's blog posts on the First Steps to Starting a Business, so you can see them all in one place.� Here they are:

Step 1: Decide on a name for your business

Step 2: Find a business location and get local and state licenses and permits

Step 3: Choose a legal form and send in the appropriate application, if necessary

Step 4: Apply for your Employer ID Number (EIN)

Step 5: Get your business checking account set up

First Steps to Business Start-up originally appeared on About.com Business Law / Taxes: U.S. on Saturday, November 21st, 2009 at 06:49:26.

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Business Start-up Step #5 - a Business Checking Accoun

Fri, 20 Nov 2009 05:46:48 +0000

This week I have been reviewing the essentials for business start-up, from a tax and legal standpoint.� Now that you have your business name, address, and legal form and your Employer ID number, you are ready to really make the business a reality by opening a business checking account.

Some advisers will tell you that you don't need a business checking account, especially if you are starting small and working from home.� I disagree (read my FAQ on why you should have a separate business checking account).� No matter how small your business or how much you want to save money, it is always best to get a business checking account set up.

Some questions to ask when evaluating business checking accounts:

Is this the bank where you have your business loan?
If you have a loan at a bank, the bank will often give you free checking for your business account. It is also more convenient to have a business line of credit and checking at the same bank, for account transfer purposes. In fact, some banks require you to open a checking account with them as part of your business loan deal.

Does the bank have online banking capabilities?
Most banks have the capability to let you see and use your account online to pay bills and transfer money and see your account activity. This is an important service if you have a bookkeeping service or off-site accountant.

Does the bank have payroll services?
If you anticipate only a few employees, you may be able to use the bank's payroll services to pay your employees and to do direct deposit of paychecks. You should set up a separate payroll checking account, but using the bank's payroll service will make things easier.

Does the bank have credit/debit processing services?
This is the bank's ability to serve as a gateway, allowing you to do credit and debit card processing services for customer payments. Most banks these days have this service, but it's a good idea to find out how much the services cost, so you can decide if you want to look elsewhere for these service.

Some other services to look for

An interest-bearing account, even if the interest amount is small
No monthly service charges
Free online bill pay services
Free viewing and printing of cancelled checks and deposits
No charges for checks, withdrawals and deposits
ATM services without fees

If you have a choice, look for the bank with the most services.

Business Start-up Step #5 - a Business Checking Accoun originally appeared on About.com Business Law / Taxes: U.S. on Friday, November 20th, 2009 at 05:46:48.

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Business Start-up Step #4 - Apply for an EIN

Thu, 19 Nov 2009 06:23:42 +0000

Now that you have your business name and location, and you have decided on a legal type, you have most of the information necessary to complete an application for an Employer ID Number (EIN). Almost every business must have an EIN, for both federal and state tax purposes.� Although it is called an "employer" identification number, this number is more like a general business identifier.� I consider an EIN like a Social Security number for a business.

When Do I Need an EIN?
If you are hiring employees, paying excise taxes, or if your business is taxed as a corporation or partnership, you must have an EIN.� Even if you don't have employees, and even if you are a sole proprietorship, you will probably be required to get an EIN by your bank when you open a business checking account or if you apply for a business loan.

Before You Apply for an EIN
I have put this series of blog posts in order, because there is certain information you need in order to proceed to the next start-up essential.� Before you apply for your EIN, you must have the following information:

Your business legal name and trade name (the name you are doing business as), if different
Your business legal form
Your business address
The number of employees you will be hiring in your first year, if any
The Registered Agent or person in charge of legal matters

How to Apply for an EIN
There are 4 ways to apply for an EIN - by phone, online, by mail, or by fax.� I suggest you print out a copy of the application (Form SS-4), then apply by phone or online.� In either of these cases, you can receive the number immediately; it beats mailing in the application and waiting weeks for the number.�

For More Information:
Everything You Need to Know about Employer ID Numbers

Business Start-up Step #4 - Apply for an EIN originally appeared on About.com Business Law / Taxes: U.S. on Thursday, November 19th, 2009 at 06:23:42.

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Business Start-up Step #3 - Choose a Legal Type

Wed, 18 Nov 2009 06:39:51 +0000

Today is Day Three of my Business Start-up Steps posts.� Yesterday, I wrote about the second step - finding a business location.

You can start a business without choosing a legal type...technically.� In this case, you would be a sole proprietor.� But every form you fill out, for taxes or otherwise, requires you to state your business type, so you might as well sit down and think about it and select the type that works best for you.

The Decision Isn't Forever
I should mention that you can always change your legal type.� It's easier to go from a simple type, like a sole proprietorship or partnership to a more complicated type, like a corporation, but it's just a matter of paperwork and notifications, and, yes, money to an attorney.� So if the type you choose now isn't working for you, or your situation changes, you can always select another legal type.

Criteria For Selection
Here are some questions to ask yourself as you consider what legal type of business to start:

How much time and money does it take to set up? The costs range from minimal, for a sole proprietorship, to expensive, for a corporation. While you certainly want to save money, this cost should not be your primary consideration.� Look more carefully at the other questions.

What happens to the business if I am no longer there? If you want the business to continue if something happens to you, form a corporation, or put provisions in your partnership agreement or LLC operating agreement to allow the business to continue without you. If you choose a sole proprietorship, the business ends if you leave or die or can no longer run the business.

How much control do I have? Select a sole proprietorship or single-member LLC if you want complete control. In a partnership or multi-member LLC, you will have to share control with your partners or the other Members. In a corporation, you will have a Board of Directors helping you make decisions, so if total control over the business is important to you, don't incorporate.

Who receives the profits and the losses? If you want all the profits, you must assume all the losses. Set up as a sole proprietorship or an LLC to keep all the profits (after taxes, of course!). If you set up as a corporation, you will have to give some money to the other shareholders in the form of dividends.

Who pays the taxes? In a corporation, the business pays the income taxes, at the corporate tax rate. In most other forms, you can decide to pay taxes through your personal tax return, depending on your personal tax rate.

What is my liability? If you are a sole proprietor, you will have all of the business liability for bad debts of the business, as well as for other liabilities, such as for negligence, product liability, or professional liability. You can limit your liability by setting up an LLC or, even better, by forming a corporation. Because a corporation is a separate entity, you MAY (capital letters here)be shielded personally from the liability of the corporation. This is a tricky area, so make sure you understand your personal liability in each of these forms of business and your liability if you personally guarantee business loans. Find out more from your attorney before you make a decision.

In the end, whatever factors are most important to you will determine the form of business ownership you choose. Talk to your CPA and your attorney for more advice and information.

For more information, read about start-up for the different business types:
Start as a Sole Proprietor
Start as a Limited Liability Company
Start as a Partnership
Start a Corporation (including S Corporation)

Business Start-up Step #3 - Choose a Legal Type originally appeared on About.com Business Law / Taxes: U.S. on Wednesday, November 18th, 2009 at 06:39:51.

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Business Start-up Step #2 - Find a Location, Get Licenses and Permits

Tue, 17 Nov 2009 06:45:36 +0000

This week I have been reviewing the essentials for starting a business, in the general order in which these steps should be taken. � Yesterday, I discussed creating a business name.

Finding a location is one of the first decisions you must make, because you must have a business address in order to complete the paperwork necessary for your legal type and to apply for an employer ID (EIN) and to get a bank account. Let's discuss the two possibilities: working from home or finding a location.

Start at Home and Change Later. You can use your home address for the business address, just to get started.� Your ultimate business address should be in the same state as your home, because moving your business to a new state can mean a lot of paperwork.

Working from Home. If you decide you want to start a home based business, you will need to check with your city or town to make sure they will allow you to operate out of your home.� If you are not going to have customers or patients coming and going, it shouldn't be a problem, but check anyway.

Finding and Leasing a Location. If you want to start a retail business or other type of business that requires a location outside your home, you will need to get busy and find a location, sign a lease, and get the property ready for start-up.� This process will take you several months, so you� might want to use your home address, as I mentioned above.

Get Local and State Licenses and Permits. When you have a location, you can then register for local and state licenses and permits. For example:

State sales tax permit for selling taxable items
Local zoning and building permits and business licenses

If it sounds like a lot of work, it is.� But it must be done.� Next, you have the information to apply for your Employer ID Number.

Business Start-up Step #2 - Find a Location, Get Licenses and Permits originally appeared on About.com Business Law / Taxes: U.S. on Tuesday, November 17th, 2009 at 06:45:36.

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I Want to Start a Business - What Do I Do First?

Mon, 16 Nov 2009 06:52:21 +0000

A phone call from a former student last week convinced me I needed to go back to the basics.� Her question was the #1 question I get asked all the time: "I want to start a business but I don't know where to start.� What do I do first?"

This week, I am focusing on essentials that all businesses need when they start. No matter how small or large the business you are creating, there are some basic tax and legal actions you must take when you first start your business.� I'll take you through my list of essentials over the next few days, and I will talk about them in the order they should be tackled.

Here is the first essential: a business name.

First, select a name for your business
It sounds easy, but it isn't.� Selecting a name can be a difficult task.�� Before you finalize your selection, remember it will be on every business document, sign, and advertising piece for many years to come.� Consider these questions:

What are you selling?
Your business name should express the essential elements you are selling - products and services.

What are your competitors' names?
Consider the names of your competitors. You don't want to be accused of taking another business's name and you also don't want to confuse customers.

How does your business name sound and look?
Your name should be easy to remember, easy to pronounce, and easy to read on a sign or on stationery and brochures.

What image does your name bring to mind?
Ask people who don't know your business about your name. You may be surprised to find out what they think it means. You might need to change your name to remove these images.

After you have selected your business name
When you have selected your business name,� don't forget these other related tasks:

Do some research to make sure you are not using a name that is already being used.� Check local, state, and U.S. resources (read this article on Researching Business Names for suggestions on where and how to search).

If your legal business name is different from your trade name (the name you will present to the public), you must file a "fictitious name" (d/b/a) statement with your county. For example, if your corporation name is Dingle Enterprises, Inc. but you are selling products as "One in a Million Tools," you must let the public know who owns the company.

Register the name with your state or put your business name on your start-up documents.� If you set up a corporation, partnership, 0r limited liability company, the registration of your business name is part of this process.� But if you have a sole proprietorship, it is a good idea to contact your state secretary of state and file a business name registration form.

Consider trademarking your business name
If your name is unique and unusual, you may want to spend the time and money to trademark your business name, to keep others from using it.

Getting your business name set up is a big decision.� Take your time.� Search to be sure no one else has your name.� Then go through the processes described above to register your name.

For More Information
All About Business Names

I Want to Start a Business - What Do I Do First? originally appeared on About.com Business Law / Taxes: U.S. on Monday, November 16th, 2009 at 06:52:21.

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Year-End Tax Planning - Contribute to Retirement Plan

Sat, 14 Nov 2009 06:09:00 +0000

I received a large payment for a product license so I talked to my tax adviser, who suggested I take some of the money and contribute to a retirement plan, to reduce my taxes. One possibility is a 401(k).� I don't have employees, but if you do, this could be a good idea.

Contribute to a 401(k) for Employees

If your company will be profitable this year, and you have some excess cash, you can save on taxes by setting up a 401(k) or Safe Harbor 401(k) for yourself and your employees. Even if you have a sole proprietorship, you can still use a 401(k) to set aside money for your retirement and save on business taxes. In fact, the process is easier with no employees, because there are fewer rules.

Tax Benefits of 401(k) plans:

You can claim a tax credit for your business for the cost of setting up and administering the plan, up to $500 a year for each of the first three years the plan is in existence.
The amounts you set aside from your business for yourself and employees are deductible as a business expense (up to specified limits)
The individual employees receive this money tax-deferred, if they put it into a qualified plan; the money isn't taxable until it is taken out.

If you set up the plan before the end of this tax year, your potential savings could more than pay for the cost of setting up the plan and funding it.

For more information on types of retirement plans:
IRS Retirement Plan Navigator
Self-Employed Retirement Plans

Year-End Tax Planning - Contribute to Retirement Plan originally appeared on About.com Business Law / Taxes: U.S. on Saturday, November 14th, 2009 at 06:09:00.

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Don't Mess with the IRS - Cases in Point

Fri, 13 Nov 2009 06:33:40 +0000

In honor of Friday the 13th, I am acknowledging some unlucky taxpayers who figured they could get away with cheating the IRS.� Silly fools!

I have reported before on how business owners think they can get away with tax evasion, for many years in some cases, hoping the IRS won't find out or won't prosecute.� They are wrong.� If the IRS suspects a business owner is trying to commit tax evasion, they can and will find out and they will prosecute. Tax evasion is a federal crime, and, conviction means years in prison, in addition to paying back the money with fines and penalties.

Examples of Businesses Convicted of Tax Evasion
I went through an IRS article listing results of general tax fraud examinations for the last IRS fiscal year (ending� September 30, 2009).� Most of these cases involve under-reporting income/filing false tax reports; I'm giving you these examples so you can know what not to do:

A roofing company owner failed to report cash deposits as taxable income.
A restaurant/supper club owner kept track of cash paid as "door income" for his supper club (sounds like a cover charge), but then didn't report this income on his business tax return.
An independent contractor tried to hide income by having his compensation paid to a limited liability company which he owned. (I guess he didn't file a tax return for the LLC.)
An underground sprinkling business owner cashed checks to avoid the $10,000 cash payment reporting requirement. He then used the money to pay undocumented illegal workers.� Two strikes against him.
A home improvement contractor ran his business in cash, cashing customer checks at a restaurant, then using the cash to pay employees and bills and to buy materials.
A software business owner deducted personal expenses as business expenses, under-reporting his income.
A truck driver training school owner instructed his employees to take cash for deposits and then didn't report the cash.
A medical doctor failed to file tax returns for two years.

You get the idea.� If you want to avoid IRS scrutiny, remember:

Cash is still income. Doing business in cash doesn't mean you can get away with not reporting the transactions.
Keep business and personal separate. Don't try to deduct personal expenses as business expenses to lower your business tax bill.
File your tax returns. If you stop filing for a year, the IRS will notice the lapse and start asking questions.

For More Information:
Tax Evasion vs. Tax Avoidance - What's the Difference?
6 Ways to Minimize Your Risk of Tax Audit

Don't Mess with the IRS - Cases in Point originally appeared on About.com Business Law / Taxes: U.S. on Friday, November 13th, 2009 at 06:33:40.

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Check Your EIN - No "Nominees" Need Apply

Thu, 12 Nov 2009 05:44:05 +0000

The IRS has issued a memo to small businesses urging them to check their EIN application (Form SS-4).� The EIN should not include the name of a "nominee."� Although they don't state specifically, I'm imagining that a "nominee" is probably an attorney who completed the form for the company and inserted his/her own name in item #3 "The person in charge of legal matters."

The IRS says it

does not authorize the use of nominees to obtain EINs. All EIN applications (mail, fax, phone, electronic) must disclose the name and Taxpayer Identification Number (SSN, ITIN, or EIN) of the true principal officer, general partner, grantor, owner or trustor. This individual or entity, which the IRS will call the "responsible party," controls, manages, or directs the applicant entity and the disposition of its funds and assets.

Nominees should not be listed on the EIN application. If you have not yet identified a "responsible party," you must do so before you submit the EIN application.

How to Change Your EIN. Check your EIN application.� If you listed a non-owner or officer in Item 3 or elsewhere, do NOT submit a new EIN application (Form SS-4). Instead, here is what the IRS wants you to do:

Submit a letter on company letterhead, if available, providing the name and Taxpayer Identification Number of the current principal officer, general partner, grantor, owner, or trustor. Be sure to include the entity's complete name, EIN, and mailing address so� the IRS� can correctly identify your IRS account.
Send the letter to one of these two IRS locations, depending on where your company has its principal place of business:

If the entity's principal business, office or agency is located in:	Connecticut, Delaware, District of Columbia, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, West Virginia or Wisconsin	Alabama, Alaska, Arkansas, Arizona, California, Colorado, Florida, Georgia, Hawaii, Idaho, Iowa, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Tennessee, Texas, Utah, Washington, Wyoming, or any place outside of the United States
Send Letter or Fax to:	Internal Revenue Service Stop 343G Cincinnati, OH 45999 Fax Number:� 859-669-5748	Internal Revenue Service M/S 6273� Ogden, UT 84201 Fax Number:� 801-620-7116

See this article for the details: Updating Incorrect Business Entity Information).

For More Information:

How to Apply for an Employer ID Number (Form SS-4)
Confused? Read about the difference between a Taxpayer ID Number an an Employer ID Number

Check Your EIN - No "Nominees" Need Apply originally appeared on About.com Business Law / Taxes: U.S. on Thursday, November 12th, 2009 at 05:44:05.

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