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Does the IRS Consider You a Business?

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By Scott Bourne
Editor’s Note: This post is written for a US audience and may not be applicable for our readers outside the USA.

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.

Accountants tell us there are nine factors that the IRS considers when determining whether or not you have a photo business or a hobby.

1. Do You Operate in a Business Like Manner?
Open a business bank account, get a business license, separate business and personal expenses

2. How Much Time & Effort You Spend on Your Business?
Keep a calendar to record the efforts you put into the business. Keep documents to prove you attended conferences, made sales calls, etc.

3. What is Your Dependence on Income From the Business?
Is the money you earn intended to eventually replace the money you earn from a non-photography job? If you’re making a profit on your photography this question is already considered answered for most photographers

4. Are Your Losses Reasonable?
If your photo business loses considerably more money than other photo businesses, you might have trouble justifying your photo business losses.

5. What Effort Have You Made to Make Money?
Attend seminars, conferences, read books, join professional associations, hire personal coaches.

6. Have You Implemented Ongoing Changes to Make Money?
Adding new products, changing advertising, adding employees.

7. What is Your Professional Experience? Do You Have Enough Experience or Access to Advisors Who Do?
Making profit from similar past experiences, hiring consultants

8. Have You Kept Business-like Records?
Kept logs of past profits and losses, receipts

9. Are Your Assets Like To Appreciate?
Real estate, equipment, online business activity, future appreciation as demonstrated in a Pro Forma Cash Flow Analysis

If you are serious about business, it’s probably a good idea to discuss these issues with a qualified professional such as an attorney and/or a Certified Public Accountant. This post isn’t meant to give legal or financial advice. It’s a primer on the IRS test for a business as described to the author by several accountants interviewed for this story. See a licensed professional to best determine how this information applies to your personal situation.

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Written by scottbourne

March 31, 2010 at 7:46 am

Posted in Business

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