joepwro@ihopa.UUCP (Joe Wroblewski) (02/01/84)
I have a question regarding people who are both an employee and a business owner. When filing for taxes, must the incomes be seperated or can they be combined? The real question is, if the business just so happens to lose money, can the losses be subtracted from the employee salary? Question 2: What makes a small business legitimate? Do you need a license? The reason I ask is what happens if a business loses money five years in a row. Will the IRS question the legitimacy of the business? Please post of netnews or send me mail. Thanks, Joe P. Wro
johnson@saturn.UUCP (Mark Scott Johnson) (02/02/84)
Yes, business losses can be used to offset other income (even employee salary when the business is only part-time). Of course, the IRS takes a dim view of ANY losses, especially those that offset other gains. If your business is profitable, the IRS is unlikely to ever question its legitimacy. Also, if it's profitable for three (or is it two?) out of five years, they'll assume it is legitimate. If it doesn't meet this test, then you're most likely to have the losses questioned. There are no hard-and- fast criteria for what makes a business legitmate, but the business must be conducted in a "business-like manner" (proper accounting techniques, licenses if required in your area or trade, etc.), the intent must be to make a profit (are you investing a reasonable amount of time to the business?), and you must be qualified to conduct the business (hanging out a shingle as a "medical consultant" when you don't have an MD is not a good idea). If the business seem legitimate, there is no limit on how long it shows a loss or on how big the loss can be and still be deductible. The IRS is mainly interested in catching people you are trying to pawn off their hobbies as businesses. So if what you're doing looks like a hobby (how many people actually make money collecting stamps or taking photographs?), you run the greatest risk of being audited. If you ARE trying to deduct a hobby, I suggest you try making it deductible as a charitable contribution. If you like flying your plane, see if there is some orphanage in Mexico that needs supplies brought down. If you like fishing, donate your catch to a soup line. You can't deduct ALL your expenses, but you can deduct operating expenses and other out-of-pocket costs. -- Mark Scott Johnson CSnet: Johnson@HP-Labs USENET: ...!ucbvax!hplabs!johnson
neal@denelcor.UUCP (Neal Weidenhofer) (02/10/84)
************************************************************************** First my credentials: I am not an accountant or any kind of professional at accounting or taxes or law. I always do my own taxes; the last time I went to an accountant, it didn't take me long to realize that I understood it better than he did. I've been audited twice and "won" them both: no change the first time (I had to substantiate some items which I did), the second time I had to redo my moving expenses and got about $200 additional refund (with interest which I had to pay tax on the following year). >I have a question regarding people who are both an employee and a business >owner. When filing for taxes, must the incomes be seperated or can they >be combined? The real question is, if the business just so happens to >lose money, can the losses be subtracted from the employee salary? You bet business losses can be subtracted from salary! That's what Schedules "C", "E", & "F" are all about. I own some rental property which has shown a loss for the last three years (more than I intended in fact but that's another story)--so essentially, I pay taxes on salary minus loss. An interesting sidelight: The loss comes off of "Total Income" rather than "Adjusted Gross" which means that you can usually deduct more for medical expenses because of the way the medical expense deduction is figured. Likewise, you can deduct somewhat less for sales tax. >Question 2: What makes a small business legitimate? Do you need a license? A small business is legitimate if it's a bona fide ATTEMPT to run a business for profit. You need whatever licenses that the various governing bodies require for that particular business but the IRS has no license requirements of its own. >The reason I ask is what happens if a business loses money five years in >a row. Will the IRS question the legitimacy of the business? I believe the IRS has a "rule-of-thumb" that they will question any business that shows a loss for more than two out of any successive five years. That doesn't mean that they will automatically disallow it however, it just means that you will have to convince them (or a court) that you're honestly trying to make a profit and not just indulging a hobby (or otherwise not trying to show a profit). Regards, Neal Weidenhofer Denelcor, Inc. <hao|csu-cs|brl-bmd>!denelcor!neal