When my husband I decided to start a business, we didn't think about the legal aspects of doing so. We didn't realize that purchasing business insurance, getting building permits and making investments all required some type of legal advice. But after speaking to a close friend, who also happens to own a small business, we contacted a business attorney. Now, we have the legal smarts to make the best decisions for our business, as well as the legal representation in case something happens to our company. I hope that you find my blog helpful and informative for your own business. It's a great resource for finding the legal advice, resources and guidance you need to get your company up and running.
It can take time to turn a profit in any business. Luckily, the IRS lets business owners deduct some of the losses they sustain during the year from their taxes. This can be a lifesaver for people involved in multilevel marketing (MLM) programs because the majority of individuals who join them lose money. However, if you're not careful when managing your MLM business, you may run afoul of the IRS and have your claim for losses denied. Here are two ways it could happen.
Multi-Year Losses Result in Reclassification
Although the IRS understands it may be a while before a business starts making money, they're not willing to wait forever for a company to get off the ground. Typically, any business that has sustained losses for three out of the five previous years will be reclassified as a hobby, and the owner won't be allowed to claim any losses on their taxes.
To be sure, the IRS looks at other factors when evaluating your business for reclassification. For instance, the agency investigates whether the losses were beyond your control (i.e. there was a natural disaster that destroyed inventory) or if you have the knowledge and expertise needed to make the business a success. Passing the tests administered by the IRS can help you avoid having your business categorized as a hobby.
If the worst happens and the IRS denies your claims, though, you may still be able to write off some of your losses as hobby expenses. Additionally, some business losses could be claimed as personal expenses, such as work-related education fees and charitable contributions. It's best to consult with a tax services specialist to determine how best to handle this situation.
Some Business Expenses Labeled Ineligible
Another issue you may run into is the IRS may label some of your business expenses as ineligible for a tax write-off. This typically happens when the expense goes above and beyond what's reasonable for the situation. For instance, you can write off meals where you discuss business with your partner or potential clients. On the other hand, the IRS may balk if you try to write off the cost of food for throwing a big party, even if it is for your business.
The same goes for business use of personal resources such as vehicles and homes. These types of write-offs are frequently abused, so the IRS will take a close look at the expenses and kick back any that seem unnecessary or misused.
For more information about how to handle business losses on your taxes or for answers to other tax-related questions, contact an accountant.