It’s from the IRS and they want to audit your business.
Whew, you think. You say to yourself that you followed everything that **** (fill in the blank) told you to do when you prepared your tax return.
But maybe, just maybe, you decide you should talk to a real tax professional before you call the IRS.
And that’s when you get the news.
You did two really stupid things when you filed your return. Those mistakes could easily mean thousands of dollars in taxes, penalties and interest. And if you told other people that they should do these two really stupid things, you could get your friends in trouble too.
So what do you do now?
STOP READING THIS ARTICLE.
Just stop reading this article if you’re the type of person who gets easily offended or doesn’t like to get bad news. If you’re bound and determined that just cause you want something to be right, that it means it is right, then you’re going to get seriously annoyed. I don’t want to deal with nasty comments and emails when you find out how seriously messed up your tax situation might be.
On the other hand, if you’re ready to hear the 2 stupid tax moves, please keep reading.
Stupid Home-Based Business Tax Move #1:
Trying to write off the start-up costs/kits and ‘auto ship’ product without considering what the tax law is. In other words – taking a deduction for the start-up kit and your monthly charge and justifying it because it’s for marketing or because
the company says you have to do it to get paid.
There are ONLY four tax possibilities for the start-up costs and regular monthly product costs:
(1) Amortizable start-up cost,
(2) Personal use item,
(3) Inventory, or
(4) Collectible asset.
Let’s start with the last one first. The only company I know that offers collectible assets is the one I’m in. To be honest, that’s a big part of why after all these years I jumped at the opportunity to be part of this home-based business. That’s because it IS collectible assets, not another lotion or potion. At the end of the day, the best thing that can happen is that you end up with a garage full of silver and gold…that you got for free. Who doesn’t like that?
Want to know more? CALL ME! I’m looking for partners who are ready to tear it up in this new venture. It’s the right thing at the right time. My personal number is 775-384-8376 or you can drop me an email. Diane@ustaxaid.com
In the case of (4) Collectible assets, assets are not deductible. They are added to your balance sheet. So, no deduction here.
(1) Amortizable start-up costs are the items that you spend to get your business going. That may include the cost to put a website up, set up your business etc. Normally these items have to be amortized over 180 months, but it is possible to make an election on the first year’s return to get a full write-off. No deduction here.
(2) Personal use item. If your company requires that you buy a start-up kit and a certain amount of personal items for personal use, then it’s not a deduction, it’s personal use. A good example of that is vitamins, skin care or juice. These are things that you’ll use personally and that are not deductible. Here’s a quote from the IRS Audit handbook on personal use items:
“What if the direct seller keeps the company’s products on hand to show to potential clients? A: the cost of a product that is used by the direct seller is a personal expense even if that product is occasionally shown to prospective customers. Some direct sellers erroneously think they can decorate their home with product and deduct the cost.”
No deduction here.
(3) Inventory. If you buy something that can be sold to customers, then it is an asset. It’s an expense when you sell it. Here’s a quote from the IRS audit handbook regarding this:
“If the direct seller has a product that is used as a Demonstrator for one year or less and that demonstrator itself is not available for purchase by the direct seller’s customers, its cost is considered a business expense. However, if the demonstrator is available for purchase by a customer, then it is to be considered part of the direct seller’s inventory.”
No immediate deduction here.
In very rare cases, part of your start-up kit and your auto ship product will be deductible. So even my list of 4 possibilities isn’t strictly accurate.
There are a lot of people with ‘one size fits all’ answers for tax treatment on the start-up kits and ‘auto ship’ products. And the IRS knows it. That’s why they are targeting home-based businesses for audit. Get good advice FIRST. And make sure the person who gives you the advice is a CPA or a tax attorney ONLY. Otherwise, you might get a big audit you don’t want.
Stupid Home-Based Business Tax Move #2:
Filing a Form 5213 “Election to Postpone Determination as to Whether the Presumption Applies That an Activity is Engaged in For Profit.” On the surface of this, it might make sense to file this form with the IRS. In essence, you’re telling the IRS that your home-based business isn’t profitable and that you want a couple more years to prove you can make it profitable.
But it’s not that simple. Filing a Form 5213 can cause a whole bunch of problems down the road.
In fact, if you filed Form 5213, there’s a good chance that is WHY you got audited. That’s because filing that form puts the IRS on notice that you have a business that is losing money. And if you think they aren’t paying attention to that, well, let’s just say they ARE paying attention to that.
And there is one other reason that makes this really stupid. You just gave the IRS two more years to audit you. The normal statute of limitations is 3 years. But by filing Form 5213, you’ve just given them 5 years to audit you. Ouch.
OK, I might have gotten a little carried away here. Maybe there was a tactical reason why you put yourself in harm’s way with the IRS. Sometimes it can be a strategy to take away from a much bigger problem somewhere else.
The real stupid strategy is no strategy. If you mindlessly follow advice because someone else did it or you read it on a free blog (like this one!) or forum, with no thought as to your particular situation, then you probably have trouble.
Bottomline: ALWAYS see the advice of a tax professional first.