Need tax advice-- business income?

[Rach467]

I will be filing my parents' taxes for them this year using Turbo Tax. My dad has a 'home business' as he likes to call it. He sells Amsoil (synthetic motor oil-- he says it's the best). The Amsoil business setup is similar to Avon or MaryKay. You pay a yearly fee to be an authorized Amsoil dealer, and you get a cut of however much of the product you sell.
On average, he gets a check from Amsoil for between $30-70 a month.. Not a whole lot considering he spends about $2000 a year on advertising, mileage going to local businesses to try to sell his product, etc. He also spent about $1800 last year attending an annual Amsoil Dealers conference in Minnesota (I think..) last Spring.
For the past 3-4 years, he has claimed his Amsoil as a home business. He deducts the mileage/wear and tear on his car to travel to businesses, as well as his advertising expenses, depreciation on his computer, and claims his office area in our home.
Last year, they went to a professional to file their taxes but it was quite expensive. They want me to do it for them this year, but all of the Amsoil stuff seems a bit complicated and I'm also fearful of an audit. I know claiming home businesses can be a slippery slope.
Considering he is sinking a great deal more money into it than he is making from it, is it worth it to claim it on his taxes? They generally owe the government money every year, so he feels claiming the Amsoil business losses help reduce the amount they owe, but I don't know how much of a difference it really makes, and if it is worth it.
Any advice would be GREATLY appreciated!

[4jacks]

1) I think they changed the name from Turbo tax to 'H&R Block, home' or something stupid like that, but that is neither here nor there.
2) Amsoil is very good oil, didn't know it was all mary kay like though.
3) If you haven't used Turbo Tax yet, you will find it is extremely easy. I actually went to H&R Block one year to have them do my taxes and you literally sit down and have this part time employee read questions on his screen and type in the answers that you give him, or from your tax papers. The next year, I just bought Turbo Tax and never went back. I swear all they do is charge you extra to type in the answers for you at the place.

I seriously recommend that you just try it and see if you have any unanswered questions. Try one run stating that he has NO home bussiness, then save it and add the home bussiness, you will see if he saves anything.

[Rach467]

That's a good idea, I hadn't thought about trying it both ways. Thanks for the advice!

[matt]

Wow, he is losing a lot of money on his home business!

I have heard that if your home business is constantly losing money year after year the IRS may decide that your home business isn't a business at all, but a hobby, and then you (your dad) will probably have to pay the difference in taxes for all the years he claimed a loss in the business.

[clydewolf]

Rach467,

No need for you to fear an audit. It is the taxpayer (your father) that should fear the audit.
You take his numbers and enter them into a tax program or onto a paper tax form. It is the taxpayer that signs the tax form as being accurate.

Turbo tax is a product of Intuit Inc.. H*R Block's program is Tax Cut. There are many other tax programs available, Tax Act, Tax Wise, are two more of which I have heard. I am sure there are others.

Generally a Tax Preparation store will enter your data into their tax program. Consider H&R Block type of business does develop their software. The tax preparer also must attend a set number of training hours every year. The tax store operations typically give you some gurarantee that if they make a mistake they will pay your tax penalty, the taxpayer will pay any additional tax. The tax store may offer for additonal cost, an insurance policy that will also pay the tax. The tax store will charge so much for each form, and on some forms, (think Schedule D) so much per line.

Rachel467, you can learn a lot by reading some IRS Pubs:
- 334 - Tax Guide for Small Business
- 535 - Business Expenses
- 583 - Starting a Business and Keeping Records
- 587 - Business Use of Your Home

That will get you started.

[TheWealthSquad]

The IRS looks at several criteria for determining if a business is a business or a hobby.

Profit and loss is just the easiest one for most people to look at.

In order to make this determination, taxpayers should consider the following factors:

http://www.irs.gov/newsroom/article/...169490,00.html gives you the folowing details they use.

Does the time and effort put into the activity indicate an intention to make a profit?
Does the taxpayer depend on income from the activity?
If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
Has the taxpayer changed methods of operation to improve profitability?
Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
Has the taxpayer made a profit in similar activities in the past?
Does the activity make a profit in some years?
Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

Losses from a side business do offset your income taxes owed. Running a small business allows you to take a great number of deductions that you would not be able too as an employee.

Most tax preparation companies require their people to have 40+ hours of training. I would suggest doing the following.

Prepare the taxes on your own using software (I really like TaxAct because it is more flexible but at times may not be as user friendly as the other packages. I believe to download and use it is free though they charge a fee to efile the return for you in your state. Federal used to be free but not sure any more)

Wait until March when the retail tax prep business slows down dramatically. Take your taxes in to be reviewed by one of the local tax prep places. Make sure you ask if they charge a sitting fee. Most of the major ones (H&R and Liberty) offer free reviews during this time of year. Call and set up an appointment and ask for some that is familiar with small businesses.

If their calculations agree with what you have done, you are free to go and file your taxes. If their calculations disagree with what you have, you have two choices. Pay their fees (returns with a small business will be higher than a normal one), go home and try to figure out what the difference is, or file them as they are and take the chance on being right.

Use last year's information as a guideline. If you don't have a copy of his return for last year, get one from him.

Also to reduce the chance of an audit, mail in a paper copy instead of e-filing. From what I have read it cuts the chance of an audit significantly.

[emptynester]

I have run a small 'business', for several years,,approx 8...My experience is that if you're losing money every year, you may as well stick to calling it a hobby..with a hobby you can claim expenses up to the amount you made. .Ex: Made 5K...you can claim up to that amount....the downside to it being a small business,,is as others have said..you can only do it so long, making no profit, whatsoever...lots of ppl claim all kinds of stuff, thereby, no profit showing, ever...crazy what some do. Ppl are afraid of taxes, I guess lol. Im going to take the next step this year..and actually become a 'small business'...so taxes will change for me...tax places will tell you opposing things...H/R told me one thing..Jackson/Hewitt..another...interesting..mostly they all say, that 'small potatoes' moneymakers rarely interest the govt/IRS...that makes sense to me. I save every scrap of paper to do with my hobby/business...everything. Gets boxed/bagged ...in case they come knocking...my tax guy laughs, cuz he thinks Im a bit anal about it...that works for me, though:) Interesting hearin all the different 'takes' on stuff:)

[Buhari]

If your business makes a profit, you'll probably owe income tax. However, what you pay depends on the form of business entity you choose. If you operate your business as a sole proprietorship, partnership, or limited-liability company, then the income tax is usually not imposed on the business entity itself, but on the owners, who then each include their respective shares of the total profit on their individual tax returns, usually by filing Schedule C to Form 1040.

[tednorris13]

Thanks for that advice. I really think that there are a lot of things to consider if you plan to start a business.


sr&ed tax credit - R&D capital complements the traditional banking sector offer by offering flexible and efficient financing solutions.