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    11 Replies Latest reply on Mar 2, 2008 6:54 PM by Lighthouse24

    Tax Filing Advice

    web123 Wayfarer

      Hello,

      I would like to know how I should prepare my tax return as an adividual who is earning money by promoting affiliate programs and various other businesses from home. I also have a full time job--I do this part time to supplement my income.

      I don't have a business name. I work with many affiliate programs. I want to know if I would need a business name to claim decuctions/show income on my Individual Tax return? With the information I have given to you, would I need to open a business account? Or personal is fine?

      Thanks for your help in advance.
        • Re: Tax Filing Advice
          LUCKIEST Guide
          Tax Filing Advice. You need to tell us more.
          *You * have a full time job.
          You don't have a business name. Is this business bringing in income??
          Who did your taxes last year??
          What State do you live in??
          LUCKIEST
            • Re: Tax Filing Advice
              web123 Wayfarer
              Hi, I simply promote affiliate programs and make few bucks here and there. I still have a full time job. I wanted to know If I should register a business name for this type of things so I could claim deductions for advertising costs? I live in Texas.
            • Re: Tax Filing Advice
              Lighthouse24 Ranger

              According to the IRS, an activity is considered to be a "business" if it is carried on with the expectation of earning a profit. You wrote that you are doing this with the expectation of making a few bucks -- and in fact if you do earn a profit in at least three of five tax years, then it is a business for tax purposes.

              The easiest thing would be to register the business as a sole proprietorship with your county clerk (the form you need is probably available on-line). I would suggest that you open a business checking account, but it isn't mandatory. At tax time, your business activity will be shown on your personal tax return using Schedule C -- all very simple.

              Hope this helps. Best wishes.
              1 of 1 people found this helpful
                • Re: Tax Filing Advice
                  web123 Wayfarer

                  Lighouthouse, thanks. I have few more questions:

                   


                  1. Should I pay all business expenses using my business account or can I pay it with my personal credit card that earns me cash back since I'm the sole owner?--Will it be a problem for tax purposes?

                   


                  2. Can I deduct the advertising costs even though it outweighs the profit I make?

                   


                  Thanks again,

                   

                  web
                    • Re: Tax Filing Advice
                      Lighthouse24 Ranger

                      Web123, regarding your questions:

                       


                      1. I'm not sure what card you have, but if that credit account is in good standing, most banks (or AMEX if it's an AMEX card) will gladly accept an application for a business card in the business' name, and then link the two together for any rewards programs. That would be the better option. You can use your personal card for business expenses, but it makes accounting and record keeping more difficult. Plus, you're missing an opportunity to build a credit history in the business' name.

                      2. I'm not a tax professional, so take my advice on this accordingly -- you can show a business loss (i.e., your cost of doing business may legitmately exceed your revenues), but that can only happen for two years out of any five year period -- otherwise, the IRS can declare that the activity is really a hobby and make you pay back taxes and penalties on all the business deductions you ever claimed. Also, my guess is that if you claim to be spending more on advertising than you're making in sales, the chances of an audit might increase. Maybe a tax pro with more experience can offer insight on that.

                      Hope this helps . . .
                  • Re: Tax Filing Advice
                    LUCKIEST Guide
                    123, Lighthouse 24 always has great answers.
                    Anybody in business should have an Accountant, A Lawyer and maybe
                    an Insurance Agent. Haveing a Professional will cost you money,
                    BUT over the long run will SAVE you MORE.
                    LUCKIEST
                      • Re: Tax Filing Advice
                        web123 Wayfarer
                        Since I'm a sole prop. business, can I list my cell phone under my business name and have it tax deducted? If I don't use my home office exclusively, am I still able to deduct expenses like utitiles bill, mortgage payment, etc? By the way, I still work a full time job.

                        So, as I understand, if I don't have any profit for the first three years, it is not conisdered a business according to the IRS? Also, I understand that I have to pay the IRS back for the deductions? Am I correct?

                        Can I register a different business name and claim tax deductions if the IRS doesn't allow me to claim deductions on my previous business? Please help.
                          • Re: Tax Filing Advice
                            LUCKIEST Guide
                            The I R S is many rules and regs.
                            Get an Accountant and a Lawyer.
                            You and I will sleep better at night.
                            Again, LUCKIEST
                            • Re: Tax Filing Advice
                              Lighthouse24 Ranger

                              If you make and receive personal calls on your cell phone, then you cannot deduct its cost as a business expense. If you have a second phone exclusively for business, you can deduct it.

                              Yes, to deduct a home office expenses, the space must be used exclusively for business.

                              Yes, if you form a new business and claim a business loss three years in a row, you run the risk of the IRS ruling that it wasn't really a business -- and recalculating your taxes for those years sans the business expenses and deductions you took.

                              I'm not sure I understand the last question -- can you clarify?
                                • Re: Tax Filing Advice
                                  dublincpa Scout
                                  For a cell phone, one reasonable and conservative way to come to a reasonable deduction is to prorate what you pay monthly between business and personal based on minutes. Any REASONABLE method of assigning costs between business and personal is acceptable. One unreasonable method is to try to claim the cell is for business only and only count personal use if you go over your minutes and incur airtime charges. I haven't seen cell phone deductions challenged or even questioned on legit clients, only the ones that were trying to get away with something by trying to pretend they had a business.

                                  For the home office deductions, Lighthouse24 is correct that the expenses are only deductible if the space is exclusively used for business. That said, the space doesn't have to be an entire room, the part of the room around a computer could be valid for example. Keep in mind that if you are claiming exclusive business use, it has to be practical. If you have only one computer in your house and you are not the only member of the household, you are going to all but have to prove that no one else touches the computer to qualify the space.

                                  Home office deductions cannot cause or increase a loss. The deductions will be suspended until the business otherwise has a net profit. I have seen people try to get around this by treating part of their utilities or rent as direct deductions on Schedule C. That is a dead loser.

                                  The bottom line is that for the most part if the business is legitimate and treated like a business, the losses/deductions may be questioned, but not likely overturned. I have had auditors try to claim the hobby loss rules with the three of five years rule on real businesses where people just made a lot of bad business decisions. As soon as the conversation turns that way, I ask if they are as comfortable taking that stance in front of Appeals or the Tax Court as I am defending against it. I have yet to hear the question a second time on any audit outside of a horse business (and even that one was a valid business).

                                  If the only reason it's a business is for tax deductions, one will almost certainly lose. Every once in a while, I get someone who wants to play the games. I won't take them even if I could use the fees because I know that I am doing them no favor. If during the conversation, the strongest defense for a position is "Who is going to know?", that is the losing side of an audit waiting to happen.

                                  If one wants to set up a second nearly identical "business" because their deductions were disallowed the first time around, they should seriously reconsider. At a certain point, mistakes become negligence and negligence becomes fraud.

                                  I now descend from my soapbox. My apologies.
                                • Re: Tax Filing Advice
                                  Lighthouse24 Ranger

                                  On tax questions, a CPA trumps a management consultant every time -- go with Dublincpa's answer!

                                  I based my post on my tax guy's response when I wanted to eliminate my primary residential phone line (since I was hardly ever there and everyone just called the business cell or office number anyway). In his e-mail response, he said I'd lose the cell phone business deduction because according to IRS instructions (and he didn't cite the specific instruction, unfortunately). "If you used your primary phone for business, do not deduct the base rate (including taxes). You can deduct expenses for any additional costs you incurred for business that are more than the base rate of the primary service. If you had a second line, you can deduct the business percentage of the charges for it, including the base rate charges."

                                  Also, I happened to have a handout from a small business seminar I participated in back in December, and notes for a session entitled Available Tax Deductions for Home-Based Businesses reads, "If you maintain a separate business phone line (or cell phone or fax line), that's a complete write-off. If you have just one phone or phone line, however, you cannot deduct the charges that are basic to maintaining that service. Only unreimbursed business long-distance calls or a pro-rata percentage of the cost of calls that exceed your monthly usage may be deducted."

                                  So that's where my answer came from -- but my philosophy is when accountants have slightly different interpretations, go with the answer you like best! Thanks for the clarification, dublincpa.