1 To avoid is legal, but to evade is illegal. U.S. Supreme Court (Gregory v. Helvering, 293 U.S. 465).
2 The IRS could claim that your business is actually a hobby, in which case you can claim deductions only to the amount of actual gross income from your “hobby.” You qualify as a bona fide business if you claim business status and conduct your business with regularity, though as a sideline. If, after the first year, the IRS challenges your “intent” to make a profit, within sixty days after receiving an IRS notice to disallow your business deductions, you can file Form 5213, “Election to Postpone Determination,” until the end of the five- year period. You can voluntarily file this form within three years after filing your first return as a business. Publication #334, Tax Guide for Small Business, available from the IRS, gives further details.
3 Remember, this is an “academic loss” in that you probably would have had similar photo, car, film, travel, heat and light expenses (deductions) whether or not you called yourself a business. Your wife’s (or husband’s) expenses are now also deductible if you can show that your spouse’s presence on a trip (or at a dinner, seminar and so on) had a bona fide business purpose (e.g., assisting you in some manner). By establishing yourself as a business, you can now legally deduct these as business expenses from your total income, thus reducing your taxes. When large corporations talk about taking a “paper loss,” this is what they’re referring to.
4 Generally speaking, the IRS won’t question expenses for meals and lodging if they’re within the limits the government allows its own traveling employees. Receipts: No receipt is required by the IRS for expenditures less than seventy-five dollars. (Note: IRS rulings change from time to time. Call your local IRS toll-free number, (800) 424-1040, to validate figures in this chapter.)
5 Must be carefully documented.
6 Depreciate major purchases.
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