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Many women opt to invest in and start their own business allowing them to work from home after the birth of children or to simply improve their lifestyle while creating a rewarding business from a life long passion. If the business operates at a loss which is common in the beginning the loss is generally allowable for tax purposes making such an endeavor even more enticing. Have you ever considered starting a small business in an area that you love or are you currently doing so?
According to an article in Forbes.com the IRS has recently created a manual to assist its agents in determining whether a small business is legitimate. Taxpayers may not reduce their taxable income with losses related to hobbies. It is therefore important to follow certain rules that substantiate an actual business and not a hobby. The article provides helpful tips on these rules and offers insight into legitimizing your small business. Read the following excerpt:
“The hobby-loss rule comes into play primarily when a taxpayer claims a loss on his tax return’s Schedule C (or if for farming on Schedule F) for a questionable activity and that loss is then used to offset other taxable income–like from a day job or investments. What can draw the most IRS scrutiny are claims of big losses for several years in a row.”
Sometimes an investment in your own business can be your best investment. Should you decide to start a business educate yourself on how to take advantage of any potential tax reductions and follow through with appropriate financial records and procedures. Ask your CPA for additional information as she will know your specific circumstance.