How the IRS Knows You are Operating a Hobby, Not a Business.

There are many business opportunities to earn extra income or full-time income.  Many will turn to a direct sales or networking marketing opportunity.

The direct sales and networking marketing industry is a popular option for many because it allows for low overhead and a high-income opportunity, if and only if you run it as a business.

IRS collection powers

That part is a challenge for most and, many times, the difference between success and failure.

Now, the key is NOT your definition of what running a business entails, but what the IRS says about it.

The IRS had a $300 BILLION tax gap.

They know there are suspicious activities for which individuals will start a “business” where really it was a way where expenses that were incurred could be written off as a loss against earned income… (not a real business, just a way to justify the money you would have spent anyways so now you want to turn it into a tax write off).

On the list of IRS, suspicious activities include:

  • Fishing
  • Horse Racing
  • Entertaining
  • Photography
  • Direct Sales/Network Marketing

Why is direct sales/network marketing on the list? The IRS knows the pattern for this industry and why 95% are really running a hobby and not a REAL business:

  1. No accounting records from the start of the business, including a budget, profit, and loss, cash flow…An accounting program like QuickBooks® can do all of this for you and more.

    You can manage your personal budget and finances or other businesses all in one place. A real business will want to know where they are from month one (even with no sales).

  2. No 5-year business plan. Do people complete business plans for hobbies? No. They enjoy the hobby and, based upon their personal budget, decide how much money they can spend on the hobby, sometimes it is more, and sometimes it is less.

    But there are no revenue projections because they do not expect to either make a lot of money or any from the hobby. A real business will have a business plan with 5-year projections (even if you do not have any idea, it forces you to put numbers to a plan).

  3. “Let’s wait and see if we make any money first” or “Let’s try it first.” This language says to the IRS, ‘I am not planning to run this as a real business, I am not willing to set it up as a real business, I am really going to operate it as a hobby (the other option) and if, and only if, I see that I am making money, then I will do the other parts necessary to operate as a business.’

As you know, 95% of small business owners fail within 10 years, 50% or more the first year, and this mindset “attitude” is the #1 reason for these sobering statistics.

It is like saying, I am planning to fail, but if I get lucky and it “really works,” then I will do the other things I am supposed to do…It does NOT work this way, and the IRS knows it.

Your Solution:

  1. Run your business as a business starting today.
  2. Get a tax and bookkeeping program, get the training to set up your books properly (and go back and enter the numbers if you started 5-6 months ago) to see what has really happened up until this point.
  3. Develop a 5-year business plan moving forward with projections.
  4. Develop a comprehensive budget for both you and the business.
  5. Make a real decision that you will run this as a business and do whatever it takes to succeed!
  6. Stop operating as a sole proprietorship (make 2020 the last year you file a Schedule C -300% more likely to be audited). Your goal is to get off that track ASAP.
  7. Form a separate legal entity for your business.
  8. Separate your personal and business credit.

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