Eight Dollar Blog

Rule #4: Remember that
your own statements may testify against you.
In determining whether you are involved in business activities or just a hobby, the IRS listens to what you say. In fact, they are very happy to listen to your statements and then use your own words against you.10

Suppose you say to someone, “Well, I’m only in this business to escape taxes.” Or, “I just want someplace to dump some expenses.” Or, “I’m only in this to get a discount on some decent golf clubs.” If the IRS gets wind of statements like these it will claim, and rightly so, that you are not in a homebased business to make a profit and you will not be treated as a business entity. One couple we know that distributed Amway products wasn’t aware of how their statements could be used against them. In tax court, the IRS attorney asked them if they would continue business even if they never made a profit, to which the couple answered yes. This showed the judge that these people were in their “business” more for social reasons than to make a profit. He disallowed all losses for this couple’s Amway business. Again, we can’t emphasize enough that you must watch what you say! Your own words will be used against you in a court of law.

Rule #5: Run your business the way
similar profitable businesses are run.
You should try to show that your activity is being carried on in a similar manner to other profitable business ventures.11 If you conduct your activity the way other successful people in the same business do, you will be able to argue vigorously that you are conducting your activity like a business with the expectation of making money. If you want to be a millionaire, hang around millionaires, or as they say:

“If you want to fly like an eagle, don’t hang around with turkeys.”

In addition, if you follow the path of a coach, mentor, or other financial expert, your chance of becoming successful is further enhanced. Adopt marketing efforts similar to those that are successful.12 Remember our discussion about successful modeling that we outlined in Chapter 11?

Following are ways that you can run your business like other profitable ventures:
1. Advertise Your Business. Keep copies of the advertising flyers,
promotional pieces, and press releases you use to promote your business.
2. Create Business Cards. Your business cards should indicate
in what type of business you are engaged, your address, and
telephone number.
3. Maintain a Business Telephone Listing.
4. Use Promotional Materials. Keep copies of brochures, press
releases, etc.
5. Use a Variety of Marketing Strategies.13 Don’t just put one ad
in one paper. Also, if you are in a multi-level operation, don’t just listen to what your upline tells you to do if you are not making money. Consult with people such as financial coaches or entrepreneurs that have been successful at marketing a business.

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever

What Is the Best Way to Keep Accurate Records?
a. Keep an accurate and complete tax diary. This diary, which can
be your appointment book or daily planner, is the focal point of your
documentation system. The smaller your business, the more important this diary becomes.

Your daily tax diary should include:
• All of your appointments.
• Where and when you travel.
• Where you go by automobile.
• Where and when you entertain business contacts.

While documentation is important, some people resist it because
they assume it will be too time consuming. But this stubborn resistance is just as shortsighted as refusing to track spending. The amount of time it takes to record necessary daily activities in your tax diary will be well worth the extra 10 or 12 seconds it takes to do so. Not only that, tracking your daily activities in this way will be just as emotionally revealing as tracking your money has been. Doing so will make you very aware of your daily habits, how you spend your time, and what you value. A good system can help you document your daily activities. (Refer to the Appendix for information on tax diary products.) Don’t cheat yourself out of these deductions or the peace of mind that comes from good documentation. Record your activities every day using a tax diary!

b. Keep permanent records. These include prior years’ tax returns,
stock purchases and sales, equipment purchases, etc. Generally, you
want to keep any record that relates to more than one tax year. If you purchase property, your permanent files should include the purchase documents, closing statements, deeds, and other expenses related to the purchase.

c. Keep business records. These include time sheets for part-time
help, receipts, invoices, cancelled checks, and other evidence that you do business on a regular basis.

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever

Rule #3: Create a business plan.
It is very important that you take this step.9 Most courts have looked favorably on taxpayers who had a business plan showing projected income and expenses for their activities. The key, obviously, is that you want to show on your plan when you expect to start producing an overall business profit. You don’t want that plan to show a profit 10 years down the road, with a loss every year subsequent to that. You want to demonstrate to the IRS that you expect to make a profit as quickly as possible. The numbers should have some reasonable basis in reality as well. In other words, you should have a rationale supporting each number, that is, an expert informed you about the number, or you referenced it through other substantiating material. You should document how you estimated each of your figures.

If your business requires inventories, obviously you should have enough inventory on hand to meet your profit objectives. Not every business will have inventory, but if you do, you should be aware of this when creating your business plan.

Business plans should generally project your business profitability from
five to 10 years; 10 years is safer. The business plan should include not only a projection of income and expenses, but also your plans for marketing the business. A marketing plan will answer this one simple question: What do I intend to do to make money? (For more information on resources for creating a business plan, consult your local bookstore, or search the Web.)

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever

More Reasons Why Documentation Is So Important
• All the numbers included in your tax return are your responsibility.
You create the numbers, not your accountant. You are required to have adequate support for your tax return. When you sign your return, you attest to its accuracy under penalty of perjury. And the only way to be sure this information is accurate is to keep good records.

• The IRS states in its official publications that you must maintain
records that support accurate tax returns. Also, these records must be made at or near the time of the expense so that you will be sure to have accurate recall. Such records must be permanent and complete. Failure to meet the adequate documentation standards of the Internal Revenue Code can result in disallowance of your deductions.6

• Documentation is also important because the IRS thinks you might cheat on your taxes, and accordingly you are assumed guilty until you prove yourself innocent. The burden of support is on you. IRS examiners are not required to help you keep records. You have total responsibility for proving your deductions.

• Finally, accurate records are important because failure to keep them results in very stiff penalties if you are audited.

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever

What steps should you take to run your activity in a businesslike fashion?
1. Keep accurate and complete tax records. This is very important. In
fact, you really have no choice but to do so if you’re going to be in business for yourself. This will help your accountant so that he or she can aid you saving the most tax dollars and so that you can audit-proof your business activities. It is our goal to help you see that keeping sound supporting documentation is the best way to keep the IRS off your back, and to help you save more tax dollars than you ever imagined. To do this, you must create new tax habits that will help you keep accurate records.

These new tax habits are not unlike those you created when you first began learning the 10 Money Mastery principles. Therefore, keeping a detailed, accurate tax diary should not be very hard for you to do, especially now that you have embraced Money Mastery Principle 2. Using this principle, you have made a habit of keeping track of how you spend money. Using this same principle, we encourage you to keep a tax diary so that you can track how your
business is conducted and how your day is spent while running that business.

2. Create a separate bank account for your business. A number of recent cases have indicated that the courts expect you to keep separate books and bank accounts for your business.7 Don’t co-mingle your personal funds with your business accounts, not even if you are a sole proprietor. Be sure to set up a separate bank account for your home-based business.8 3. Be sure to control your own money. Do not transfer the authority to sign checks over to family members, for instance, or other employees. Sign your own checks. Use purchase order systems where applicable.

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever

Rule #1: Show business intent.
You must show that you entered your business activity with the intent to make a profit. As we have already noted, it doesn’t have to be a big profit; it can actually be quite small, but it does have to be some kind of profit. A majority of court cases on this subject indicate that you are required to have an honest profit objective when you undertake the venture. Thus, if you have a sincere purpose in the venture, including eventually reaping an overall profit, it will be assumed that you have a profit motive.

Tip: Document your intent by sending a letter to your sponsor (for MLM networking opportunities) stating why you are entering into the business, and emphasizing your desire to make a long-term profit or career out of the homebased business. Another way to document business intent is through creating a business plan (more information on this later in the chapter).

Rule #2: Be businesslike.
Conduct your business in a businesslike fashion. Such advice may sound very simple, but it’s probably the single most important factor in the IRS’s determination of your intent. Is the manner in which you conduct your activity in accord with good business practices? Regardless of whether you make a profit, the IRS essentially wants to see you running your business as if you are serious about it.

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever

Fortunately, Congress has given all taxpayers a way to be absolutely sure that their activities will be treated like business operations, and not like a hobby. If your activity shows a profit for three or more consecutive years out of five, it will be presumed by the IRS that you are engaged in a viable business.3

Note: For those business owners engaged in breeding or racing activities such as horse racing, dog racing, dog breeding, car racing, dog and horse training, and so on, then that activity should show a profit two out of seven years.4

But what if you don’t show a profit for three years out of the five, or if your first years are a loss? As long as you are running your venture like a real business endeavor and not as a hobby, the law cannot pronounce limits on your losses, even if the IRS tries to declare your business a hobby without waiting the three years for you to establish an operating history.5

That’s why it’s so important that you know the rules about how to run your business like a real business. There are numerous standards that the courts use to ascertain whether you are actually running a business, and helping you understand them is what this chapter is all about.

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever

It should come as no surprise then, that it is very much in the interest of the IRS to declare that you are playing at being in business, and not actually running one. The IRS, and Congress of course, are looking for ways to declare that what you do for your home-based business is a hobby and not a viable means to make a profit. If the IRS can demonstrate to its satisfaction (and the courts’, if it should get that far), that you are only engaged in a
hobby (or simply “monkeying around”), then no home-based business losses can be taken by you.1 That’s worth repeating:

Activities that are deemed hobbies, or not engaged in for profit, do not qualify for business losses or for deductions above the income from the hobby.

That means if you only make $200 in a year from your home-based
hobby, your deduction will be limited to $200. Even worse, there is no
carryover of those excess deductions; you just lose them if they are declared to be a hobby by the IRS.2

Thus, reclassifying your activities as a hobby, rather than a business, is the IRS’s favorite weapon. Therefore, it is vital that you apply the following tax strategy.

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever

Do things right the first time.
Such advice is sound, especially when it comes to setting up a new homebased business. In Chapter 12, we outlined how to start things off on the right foot by selecting the best way to legally structure your new venture. Now you are ready to begin “setting up shop,” and it will be imperative that you do that right the first time, too. In this chapter, we outline some very important rules that will help you conduct your new venture—rules that will help you see that if you’re going to be in business, you must act like it!

As we have already emphasized in Chapters 11 and 12, running a homebased business is the best way to take advantage of all the tax deductions available to you during the accumulation stage. Why? If your business produces a loss, you can generally deduct that loss against any form of income you have such as interest, dividends, rents, retirement income, and wages. In fact, you can even use those losses against your spouse’s income, if you file jointly. These are only some of the wonderful tax-saving aspects of being in a home-based business.

Naturally, the IRS knows about all these wonderful benefits. And that’s why it doesn’t want you to take advantage of the home-based business strategy. It doesn’t want you to learn the rules of the tax game to the extent that you can play it on an even playing field. It doesn’t want you to know about all the “good” tax codes that allow you to take deductions for your home office, entertainment, food, and other business expenses. It wants you to remain in the dark. Because if it can’t keep you in the dark, it knows you’ll save valuable tax dollars that could be coming into the federal
coffers instead.

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever

This week we challenge you to take the time necessary to learn more about each of the ways you can legally structure your business.
To do this, we recommend the following:

1. Search the Web for more information on corporations, sole
proprietorships, partnerships, and LLCs.
2. Refer to your local library for more specific information.
3. Contact your state’s division of corporations and commercial code.
4. Seek the advice of professionals such as accountants and lawyers. Keep in mind that just because these people are professional, does not mean they are infallible. It is your responsibility to know as many rules as possible. Learn
enough so that when you do seek out their advice, you’ll know whether it’s sound or not. Remember Principles 5 and 6.

(Refer to the Appendix of this book for more information on business
structure.)
Once you have investigated each business entity, determine which structure is right for you. Then read on. The following chapters will help you learn what you need to know to set up your home office so that you can take advantage of as many tax saving strategies as possible.

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever