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Old 04-25-2006, 02:50 PM   #1
fuzzycuffs
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Thumbs up The ultimate tax shelter: Owning your own business

http://moneycentral.msn.com/content/...ers/P33572.asp

Quote:
The ultimate tax shelter: Owning your own business
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The surest way to reduce your taxes is to convert personal expenditures into allowable deductions. Turn even a hobby into a business and you'll cut your tax bill.

By Jeff Schnepper

The No. 1 way to reduce your taxes with a smile is to convert your personal expenditures into allowable deductions. It sounds tricky, but it may not be so difficult as you think.

Here's how you do it: Turn yourself into a business owner. This is not complicated, expensive or difficult to do, and incorporation is not necessary.

Establishing a ‘profit motive’ is the key
To be in business, you merely declare it. And by doing so, you can magically turn personal expenses into tax deductions. If you want to operate in a noncorporate format, as an individual proprietorship, but under a different name than your own, no problem. It’s easy.
Looking for a loan?

In some states, you may have to file a “DBA” (doing business as) form with your local county clerk. Basically, you just fill out a form with your name, address and the assumed name under which you’re doing business. For example, I might be “Jeff A. Schnepper DBA Super Tax Savings Associates.”

Here’s the best part: Your business doesn’t have to make a profit for your expenses to be deductible. All you have to do is establish a “profit motive.” Under the Internal Revenue Code, a “profit motive” is presumed if you earn any net income in any three out of five business years.

It’s recognized and expected that new businesses probably won’t make a profit in the early years. In fact, in the early years, you can insist that the IRS defer any challenge for the first five years as to the legitimacy of your business by filing Form 5213.

Remember you don’t have to show a profit -- just a “profit motive.” In one case, despite 20 years of losses, the court found a profit objective and allowed the deduction of business losses in full for one company. The case was not unusual.

The test for deductibility is whether you have an actual and honest profit objective. You need not have a reasonable expectation of a profit. While the Tax Court requires a primary or dominant profit motive, the U.S. Claims Court has held that having a reasonable chance to make a profit, apart from tax considerations, will suffice.

The test is subjective: Was your intent to earn a profit? The IRS looks at the following factors to decide if your intentions are honorable:

* The manner in which you carry on the activity.
* Your expertise and the expertise of your advisers.
* The time and effort you expend in carrying out this activity.
* The expectation that the assets used in your business may appreciate in value.
* Your success in carrying on similar or dissimilar activities.
* Your history of income and losses with respect to the activity.
* The amount of occasional profits, if any, that are earned.
* Your financial status.
* The elements of personal pleasure and recreation. That doesn’t mean that just because you enjoy doing your “job” that the expenses aren’t tax-deductible. The Tax Court has ruled that “suffering has never been made a prerequisite for deductibility.”

Moreover, even if you’re employed full time elsewhere, that doesn’t prevent you from having another vocation on the side. I spent many years as a full-time college professor while running a legal and accounting practice on the side. This technique works whether your business is your primary source of income or it’s a sideline.

Your hobby can be a business
That means your hobby could qualify as a business. In the process, you’ll cut your tax bill.

One of my clients raced stock cars as a hobby. When he came to me, we converted his “hobby” into a business. He had cards and stationery printed. He ran ads looking for a sponsor. He gave what once was his hobby the image and appearance of a business, and he demonstrated a real profit motive. He wanted to make money.

This client had a salary from his primary job of $40,000 a year. When his new business expenses were deducted, not only did he pay zero taxes but he qualified for the earned income credit, so the IRS actually paid him.

Two years later, he was audited for that year’s return. The law requires that you prove your business expenses, with receipts, checks or a journal that’s regularly updated. Unfortunately, he had none of these for the first year. His expenses, however, were legitimate, and he had the receipts for the subsequent two years. On the basis of the receipts for the two subsequent years not in question, this taxpayer with $40,000 in other income and no receipts, after an IRS audit, paid less than $100 in taxes, including penalties and interest. Had he kept the records for the first year, he would have paid nothing.

How to qualify as a business deduction
To qualify as business deductions, your expenses must be:

* Ordinary and necessary -- defined by the courts and the IRS as “reasonable and customary.”
* Paid or incurred during the taxable year.
* Connected with the conduct of a trade or business.

The term “reasonable and customary” depends on your specific business and the business customs in your locale. The expenses don’t have to necessarily be reasonable and customary to you, but simply to your particular trade or industry. There are innumerable cases of “hobbies” converted into “businesses” with expenses allowed.

In one case, a husband and wife produced, exhibited and sold their sculptured works. Their expenses were considered ordinary and necessary business expenses. In another case, a coal miner operated a kennel for bird dogs. For 11 consecutive years, he lost money. But the courts allowed the deductions and the losses because there was a profit objective.

In a more recent case, a high school teacher’s golfing activity was declared an activity with a profit motive, so he could legally deduct what once was his “hobby.”

Focus on your profit-making motive. Remember that it’s not what you pay in taxes that counts, it’s what you keep.
This looks very very interesting. I'm paying a lot of taxes (in the second to highest tax bracket), and with normal deductions I could never come down to the lower tax bracket to pay less taxes, so I'm trying to figure out a way to save on taxes for 2006/7.

Janq, I've noticed in a lot of your posts that you own your own business. I'm sure you have some knowledge in this area.
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Old 04-25-2006, 03:07 PM   #2
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Not so much. It's a little more complicated than that. Most likely, such a "business" would be considered a passive activity and you can only deduct expenditures from any profits derived from said "business", so it wouldn't affect your taxes from your income at all.
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Old 04-25-2006, 03:08 PM   #3
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damn right! Everything is a business expense...mortgage, car payments, telephone bills, electricity bills, computers, cell phones, toilet paper, trips/travel...you name it, it can be a business expense
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Old 04-25-2006, 03:12 PM   #4
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IBaudit
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Old 04-25-2006, 03:13 PM   #5
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classic
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Old 04-25-2006, 03:13 PM   #6
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Uh, yeah. Don't post profits for 4 years and see what happens. This is terrible advice.
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Old 04-25-2006, 03:15 PM   #7
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there was some pyramidal company that was started by offering such advice on starting a company to write everything off...... i wish i could remember who it was
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Old 04-25-2006, 03:17 PM   #8
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I want to start my own business so bad, but I draw a blank on how to start it, run it, and market it. Rather pathetic I know, but I'm hoping college will provide those skills. Can anybody confirm or deny this? I'd love to hear how people went about starting a business especially if it involved any particular books. Thanks.

Benny
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Old 04-25-2006, 03:20 PM   #9
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It's true.

I run all of my hobby & sports related stuff through my corporation as expenses.
Guns purchased, ammo, both our kayaks & all the wet gear, paintball equipment & supplies, my roadbike, the STi and all that associated stuff, CCW classes, the whole lot of it expensable and what can be demonstrated as business/profession related/supportive are deductible.
Key though is you have to have turned a profit in order to see benefit from as much.
Pretty much everything is expensable from meals and entertainment to cell phones, and build out costs too toward support of ones home office which might include an LCD projecter and 6.2 surround.

This is old news circa the early '70s.
Again though key is that there must be profits to run a deduction against.
Also with corporate profits they are not part of ones personal tax be it a single share holder or multiple. There is direct benefit though to the shareholder(s) in thet they don't wind up spending post tax dollars of their own on items they otherwise would have purchased with thier own money and have full ownership access to.
Jack Welsh was famously noted for this in having all of his living expenses down to toilet paper purchases paid for and expensed by GE.

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Old 04-25-2006, 03:26 PM   #10
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Quote:
Originally Posted by Janq
It's true.

I run all of my hobby & sports related stuff through my corporation as expenses.
Guns purchased, ammo, both our kayaks & all the wet gear, paintball equipment & supplies, my roadbike, the STi and all that associated stuff, CCW classes, the whole lot of it expensable and what can be demonstrated as business/profession related/supportive are deductible.
Key though is you have to have turned a profit in order to see benefit from as much.
Pretty much everything is expensable from meals and entertainment to cell phones, and build out costs too toward support of ones home office which might include an LCD projecter and 6.2 surround.

This is old news circa the early '70s.
Again though key is that there must be profits to run a deduction against.
Also with corporate profits they are not part of ones personal tax be it a single share holder or multiple. There is direct benefit though to the shareholder(s) in thet they don't wind up spending post tax dollars of their own on items they otherwise would have purchased with thier own money and have full ownership access to.
Jack Welsh was famously noted for this in having all of his living expenses down to toilet paper purchases paid for and expensed by GE.

- Janq
Exactly, but this jerkoff that wrote this article is telling people that you don't have to turn profits. Yeah, maybe not for the first couple of years you can post losses. But keep doing that for 4 years or more and you are going to get audited. Then you're screwed when you try to explain expenses on stuff for a business that doesn't even really exist.
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Old 04-25-2006, 03:32 PM   #11
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Yeah, he's totally wrong on that.
There is no free money atleast not in that way.
The higher your companies profitability the higher the potential of real deductible dollars available against expenses.
Another famous case of this the Oracle sea racing boats & effort that are paid for in whole by the corporation same as Richard Branson & Virgin Airlines support of the planes and airships that have been trying to break various world records. All of them expensed and deducted against profits.

Trying to run deductions against zero or even negative profits is a bad idea as you note for the long term.
Any accountant or CPA worth their salt would advise a business entity or poerson against such a nutty idea.
Definitely the business has to be solvent, profitable and self sustained (e.g. not funded from the owners pocket or that of other business related clients/buyers).
I'm confused as to what the author is trying to get across as an ultimate point.

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Old 04-25-2006, 03:44 PM   #12
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the guy who wrote the article is an idiot. I can't believe this is on MSN.

<--- CPA

janq, you are spot on.
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Old 04-25-2006, 03:52 PM   #13
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He's not saying that you can never turn a profit and still deduct.

Quote:
Under the Internal Revenue Code, a “profit motive” is presumed if you earn any net income in any three out of five business years.

It’s recognized and expected that new businesses probably won’t make a profit in the early years. In fact, in the early years, you can insist that the IRS defer any challenge for the first five years as to the legitimacy of your business by filing Form 5213.
But the crazy part that really caught my attention:

Quote:
Remember you don’t have to show a profit -- just a “profit motive.” In one case, despite 20 years of losses, the court found a profit objective and allowed the deduction of business losses in full for one company. The case was not unusual.
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Old 04-25-2006, 04:13 PM   #14
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Fuzzy,

For kicks I'm going to forward this MSN link to my accountant, who is a retired IRS 'corporate fraud' lead auditor and general nit picker. Nothing gets by him, good or bad.
I don't know for sure as he's a bit of an odd guy but I'm gonna bet he'll get a chuckle out of this article.

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Old 04-25-2006, 04:19 PM   #15
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Quote:
Originally Posted by MSN
Jeff Schnepper
is the author of the best-selling, "How to Pay Zero Taxes," which is in its 15th edition. He has written several other books on finance and taxation including "TurboTax Deluxe," "How Much is it Worth? Asset and Business Valuation," "The New Bankruptcy Law: A Professional Handbook," and "Inside the IRS, How it Works (You Over)." A former professor of taxation, accounting and finance, Schnepper has argued before the U.S. Supreme Court and has appeared on numerous national and local television programs. He lives in New Jersey.
Info on the dude....
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Old 04-25-2006, 04:20 PM   #16
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I've been thinking about creating a business for my photography work, as it's a hobby that generates some pretty hefty expenses (equipment, web hosting, potentially travel, etc.), but has reasonable potential for profit.

Do you have to file quarterly taxes for such a venture? How difficult is the setup and tax management for something like that?
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Old 04-25-2006, 04:29 PM   #17
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Quote:
Originally Posted by beethoven
Info on the dude....
looks like he is qualified... and an expert; but the article does seem misleading.
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Old 04-25-2006, 04:30 PM   #18
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Quote:
Originally Posted by Kha0S
I've been thinking about creating a business for my photography work, as it's a hobby that generates some pretty hefty expenses (equipment, web hosting, potentially travel, etc.), but has reasonable potential for profit.

Do you have to file quarterly taxes for such a venture? How difficult is the setup and tax management for something like that?
The answers to _every_ one of your questions asked above and not even thought of can be found via the Small Business Development Centers which are located nationwide. IRL I very often strongly suggest potential entrepreneurs to go here first as stage 0 and step 1.
http://www.sba.gov/sbdc/sbdcnear.html

There are alot of things to consider toward such a project and its real viability.

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Old 04-25-2006, 04:31 PM   #19
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Quote:
Originally Posted by WRXVT
looks like he is qualified... and an expert; but the article does seem misleading.
Agreed.
I just sent my guy the link and asked if he's ever heard of dude.

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Old 04-26-2006, 03:05 PM   #20
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Bump (bored at work waiting for a meeting)

And Janq, did you ever get a reply from your accountant?
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Old 04-26-2006, 03:11 PM   #21
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True. I have a side consulting business that instantly makes a large fraction of my personal expenditures deductible against (cell phones, computer crap, etc, etc).

Rich folk are rich for a reason. Don't pay a single nickel more than you owe, and deduct EVERYTHING.
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Old 04-26-2006, 03:18 PM   #22
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Quote:
Originally Posted by mexicanpizza
True. I have a side consulting business that instantly makes a large fraction of my personal expenditures deductible against (cell phones, computer crap, etc, etc).

Rich folk are rich for a reason. Don't pay a single nickel more than you owe, and deduct EVERYTHING.
Yeah, but your side consulting business turns a profit.

The thing that we're all wondering about is this "profit motive." No doubt that if you have a business that is profitable (at least after a few years), it is a huge tax shelter. But this guy is claiming that all you have to do is prove that you want to make profit, but might not be making profit for one reason or another, even after time.
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Old 04-26-2006, 03:18 PM   #23
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Quote:
Originally Posted by fuzzycuffs
Bump (bored at work waiting for a meeting)

And Janq, did you ever get a reply from your accountant?
I don't know...damn MS Windows ran an update last night and rebooted my machine.
Since then my internet and everything on my local machine/laptop was a mess and non-funtional.
I've just in the last hour or so got that back up and running regular along with FTP and some other critical net apps.
Now I'm working on my e-mail as Thunderbird keeps reporting it can't connect.
Crap ass MS.

I'll bump this thread though soon as I hear from him.
he's very good about getting back to me on stuff.

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Old 04-26-2006, 03:47 PM   #24
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When I first read this article, I got all excited. I play alot of golf (well, I'm starting too atleast), and deducting my golf expenses through a business sounds great.

But, after reading all the replies, it doesn't seem like a viable option. Is this doable?

Skeletal Plan:
-Start a Golf training school

-Expenses would be trips to the golf course, driving range, clubs, golf accessories, gas money to/from course, cell phone expenses.......that's all for now.

-Profit wise - I could assume all the expenses for my friends. Meaning, they pay me to buy their tokens, entrance fees, etc. And I would document that as my income.

My seasonal income would most likely be less than $1000 from all the money collected from friends.

Does this seem possible? Would this consititute a "profit motive", and a reasonable profit?

I feel like this could be extended to other hobbies as well, such as Auto-x and landscaping, all of which I do, and usually help friends with.
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Old 04-26-2006, 03:56 PM   #25
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yeah, anybody remember alacrity's abandoned turbo new yorker?
I had some schemes goin on involving starting a drag racing team focused on that car, with a goal to make money bracketracing as my profit motive.
thing is, I could then deduct: gas, insurance on tow vehicle, mileage on tow vehicle, etc.
only holdup is that I have nowhere to put the thing..
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