| Many people will file articles of incorporation, articles of | | | | to the business in order to help it grow. The IRS |
| organization, and the likes. This document is one of the | | | | contends you are allowed have a loss 3 out of the |
| first steps in forming your new business. Most people | | | | last 5 years. If it extends further than that, they can |
| don't know that this is just the start of the business. | | | | determine your income to be hobby income. |
| You will undoubtedly have expenses involved in | | | | When starting a business, proper planning needs to be |
| starting. Most businesses don't make it past a few | | | | done. If you properly plan out how your expenses |
| years. Most businesses are started with something the | | | | should run and how much income you plan on having, |
| owner loves to do. Here are some things to do in | | | | you can avoid the IRS categorizing your business as a |
| order to assure your business doesn't fall into the | | | | hobby. |
| category of hobby income. | | | | 1. Start up expenses should be amortized- Generally |
| Hobby income is income from activities that are | | | | start up costs can't be recovered until you sell the |
| considered hobbies. It may be maintaining a home | | | | business unless you amortize them |
| aquarium, selling lemonade, babysitting, etc. Under the | | | | 2. Know what to spend money on that will give you |
| IRS rules, you must report any income that is not | | | | the greatest return- If you keep track of your |
| specifically excluded. Hobby income needs to be | | | | marketing efforts, you will have an idea of how much |
| reported, but any associated expenses can't be | | | | they bring in. |
| claimed against the income. Business income is income | | | | 3. If you are on your 3rd year and you have not turned |
| derived from the activities of running a business. This | | | | a profit, be careful of any unnecessary expenses the |
| business could be the same as the above mentioned; | | | | next year, because you may fall into the hobby |
| the only difference is expenses against the business | | | | income category. |
| are allowed. | | | | I believe the IRS has been fair in establishing this rule of |
| Many people who don't have their taxes prepared by | | | | conduct. After all, you get into business to make |
| a professional tax preparer may fall into the trap of | | | | money. If you go too long and don't turn a profit, the |
| reporting losses to reduce other income. The first few | | | | IRS looks at it as if you are doing this for fun. |
| years of a business are usually hard. Most business | | | | Remember, proper planning and execution of that plan |
| owners put whatever money they make right back in | | | | will help you avoid this. |