South Carolina Tax Attorney

If you are in tax debt with the IRS there is a way you can negotiate with the IRS to settle the amount you owe for less.  This IRS program that allows for this is called an offer in compromise.  As an attorney, I have negotiated lots of these for my clients.  However, I know that not everyone can afford an attorney, and some would just prefer to do it themselves so they are in complete control.

Would you be interested in a product that walked you step-by-step through the offer in compromise program?  If so, please complete the very short survey.  Everyone who completes the survey will receive $20 off the product when it is released - to get the discount, just leave your e-mail address on the last question of the survey and I will e-mail you when the product is released.  It should be very soon.

We are continuing on through the Hobby vs. Business series and have come to the second of the factors used to determine whether your activity should be considered a business or a hobby and we remember that this determination could make a huge impact on your tax returns and what you will owe the government this year.

Factor 2 is somewhat similar to the first factor relating to the time and effort put into the activity.  But it starts to get a little deeper.  The question is, “do you depend on income from the activity?”  I would like to add a few more words “for your survival?”  Some activities make money; some make lots of money, and lots of times you have to spend a lot of money to make this money.  But, are you relying on this activity to be able to pay your bills this month?  If so, it is much more likely that your activity is a business rather than a hobby.  If you are doing the work and just piddling around with the little bit of money that you are earning it may not be considered a business.

Keep in mind that none of these factors are determinable in themselves in the determination of “hobby or business” but they are each considered in the equation by the IRS.

In the series we started earlier this week Hobby vs. Business we briefly mentioned several factors that the IRS will use to determine if the activity you are engaged in is actually a business where you can deduct expenses that you incur in trying to make the business work or if it is actually just a hobby where you would not be permitted to deduct any expenses.  The difference could mean a lot of money in your pocketbook or going to Uncle Sam.

Anyway, the first of the factors is: does the time and effort put into the activity evidence an intention to make a profit.

So this one sounds easy enough.  The underlying assumption is that if you are working and trying to make a profit you are going to be putting a certain level of effort into the activity.  Now just putting effort into something does not mean you are working in a business.  You also have to be working towards making a profit.  For example, I enjoy video editing.  I do a lot of work for myself and for my church.  I spend a lot of time on this for several reasons: first, because I don’t spend a lot of consistent time doing the work, it takes me longer to get it done; second, the work, by its nature, takes a long time.  I, therefore, spend a lot of time doing the work.  On the other hand, I do some projects as a business.  I do several things activity to show that I am working toward making a profit.  First of all, I spend some time advertising, we spend time working with clients, I manage costs, keep up with records and do professional work.  I may not spend 40 hours per week doing this work, but that is not required.  Making sure the time and effort that you are putting toward the work is with the intention to make a profit and not just for fun is the key to this factor. 

Any questions?  Make a comment on this post and we can continue the conversation.

Most of my clients are small business owners and individuals who are getting “beat-up” by the IRS for the taxes they owe.  They are constantly berated by the IRS employees they speak to on the telephone for not paying their taxes - no matter what the reason.  Now, I understand it is the law that you have to pay your taxes and I pay my fair share.  That’s not the point.  The point is that these people who have opted to take the security of a government job take pot shots at other Americans who are taking risks, creating businesses, creating jobs and income, and more revenue for Uncle Sam.  Sometimes there is a good reason that they are behind in their taxes.  There are very few people who actually hire an attorney to represent them in resolving their tax liability that actually feel like they do not owe the money.  Most of my clients say they owe the money, they just want to pay their fair share and not the penalties and interest that accrue at mobster-like paces.

I came across this article on FoxNews.com about Federal employees not paying their taxes.  How about that as a theory for the tax gap that is constantly blamed on American small business owners?  The article states that $3.5 Billion dollars was unpaid from Federal government employees and retirees last year.

I am frequently asked if you have a “small” business in your home do you have to pay taxes on what you earn.  Of course, you have to pay taxes on your net gain.  So that leads to the next question.  What type of expenses can I write off in my business.  The IRS regulates what expenses can be deducted from your business income to determine what the net profit is for a business.  For a legitimate business you can deduct “ordinary and necessary expenses for conducting a trade or business.

For this post and probably a short series posts we are going to discuss what sets a legitimate business apart from a hobby.

There are several factors that are used by the IRS to determine what is a “business” and what is a “hobby.”  The difference could mean whether you can deduct expenses on your tax return and for some people that may be a substantial amount of money you will owe Uncle Sam at the end of the year. These factors (listed below) are not all-inclusive and they are all weighed in the decision, stated another way - one factor does not determine the classification as hobby or business.

1. Does the time and effort put into the activity indicate an intention to make a profit?
2. Do you depend on the income from the activity?
3. If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
4. Have you changed your methods to improve profitability?
5. Do you have the knowledge needed to carry on the activity as a successful business?
6. Have you made a profit in similar activities in the past?
7. Does the activity make a profit in some years?
8. Do you expect to make a profit in the future from the appreciation of assets used in the activity?

With few exceptions, an activity is presumed a business if it has made a profit in at least three of the last five years.  Follow along with me through this series to determine if that little “business” you have going on in your garage is truly a business or more of a hobby.