Tips For Businesses

Hobby Or Business

Hobby rules and business tax rules are different. A hobby must report income, but can deduct expenses less than income, but no more than income. Often businesses have losses, and these may last years. A true business must have a profit motive and try to make a profit. Then it can take all business expenses that may be more than income.

In order to avoid hobby loss rules, a taxpayer can create a corporation, a special corporation to take advantage of all expenses. Losses can be carried forward to offset future income an not be lost.

IRS has a nine factor test in making this determination. If you had a gain in any three of the previous five years, you are presumed to be a trade or business without getting into the nine factors

  1. Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
  2. Whether the time and effort you put into the activity indicate you intend to make it profitable.
  3. Whether you depend on income from the activity for your livelihood.
  4. Whether losses are due to circumstances beyond your control.
  5. Whether you change your methods of operation to improve profitablility.
  6. Whether you or your advisers have the knowledge to carry on the activity as a successful business.
  7. Whether you were successful in making a profit in the past.
  8. Whether the activity makes a profit in some years and how much.
  9. Whether you can expect to make a profit from the appreciation of the assets used in the activity.

A taxpayer can create a “C” corporation to take advantage of all expenses. Losses can be carried forward to offset future income and not be lost.

Corporation Or LLC

How Many


Single Member LLC

S Corporations

C Corporations

Hobby To Business


A corporation is a tax reporting entity, an LLC, Limited Liability Company, is a state creation intended to give legal liability protection. (Often liability is lost because of commingling of business and personal funds.)

An LLC can be a corporation, a partnership or a self employed person. Register with the State, for Wisconsin, it is the WDFI (Wisconsin Department of Financial Institutions).


Hire Family Members

Hiring a family member can be a very smart move. It may bring a family together, and it has some financial benefits. A child working in a parents business does not have to pay FICA or Unemployment tax. The child can earn up to $12,000 annually tax free and the money can be used to fund an IRA.


Audit Proof Your Business

The IRS does fewer audits, but the audits it does targets businesses. So, keep records and have a separate bank account for the business. Keep personal expenses and business expenses separate. Run your business as a business.


Don’t Use Round Numbers

When preparing a return don’t use round numbers. It’s an automatic tell you don’t have records. A good tax preparer will use only numbers that make economic sense. Why, for example, spend $12,000 on vehicle mileage when you gross $8,000 in income.


Automatic Extension

File for an automatic extension to file your return. Rumor has it the IRS will be out of money to audit by October.