Especially if you are a sole proprietorship! The IRS would love for you to continue as a sole proprietorship in your business, because that makes you an easy target! They know that sole proprietorships are most likely to under-report their income and over-report their business expenses. Definitely, low hanging fruit!
The IRS believes there to be a $300 BILLION tax gap —$300 BILLION in uncollected taxes — each year! The biggest culprit? Not large corporations, but small business owners. In fact, sole proprietorships are 300% more likely to get audited than someone who does not file a schedule C!
The bottom line: if you are operating your business as a sole proprietorship you are risking an audit. In fact, there have been recent cases where the IRS is expecting you to document your business decisions!
That is unheard of. From the IRS’s point of view they want to understand why you started a business, spent all this money to get started, went to several follow up seminars and after nine months you still have only made one sale!
Want to get the IRS really hot and bothered? Don’t run your business like a business. Run it like a hobby, and just watch them have their way with you!
This of course is the model for many people in the direct sales or networking industries. In my opinion, the IRS is basically saying, “what sane person would spend all that money for nine months only make one sale and continue with it”.
Certainly you could NOT be serious about running a real business because if you were, you would have realized after 90 days without any sales, why would you throw any more money at it! It must have been a hobby!
Are their companies out there that require a lot of start up capital and months before any revenue, of course, but why E-Bay users, network marketers and direct sales people are targets is that the expectation not to make a profit is very high. Bottom line, if your business is treated as a hobby you will not be able to use all the losses to offset other forms of income (like W-2 income from your full time job).
All this puts a damper on one of the major reasons to start a home based business or join a network marketing company; because of the tax benefits of running your own business. It only works if you actually run it like a real business. No short cuts allowed!
Ignore proper accounting systems from Day 1 just “try” your new business to see if it works (all the signs of a hobby) and see how fast those business deductions are disallowed!
If you fall into the “hobby-business” category, don’t expect to get your IRS “love letter” notice right away. This particular valentine may take its sweet time to get to you, in the form of an audit with penalties plus a few years’ interest! Who said love doesn’t last?
Solution: You need to run your business like a business. Incorporate or form an LLC for your business, get off schedule C, document all your business expenses, use QuickBooks or some other accounting software to operate your business and learn how to separate your personal and business credit!