Qualifying for Home Business Tax Benefits
Home Business Tax Benefits: Defining Your Business
Often self-employed business owners, especially during start up of their business find themselves not sure of the tax implications and IRS requirements to properly conduct business without fear of breaking rules and/or regulations.
Starting any business requires some fore thought and planning but first things first. Defining your business is a good place to start. Defining any new business is simply choosing something you have expertise in or something that interests you but, it is important to understand that all businesses must qualify for IRS purposes to be able to deduct business expenses, including option to set up a retirement plan and/or claim other tax benefits allowed to business owners.
Profit Motive
Defining your business requires a “Profit Motive”. A Profit Motive means simply that you must conduct business for profit, always seeking economic gain. Economic gains exist by selling a physical product and or services related to your business. The product can be an E-product, something that exists in download form only or a physical product. This Profit Motive is what separates a business from a hobby.
A hobby is an activity engaged in for self-satisfaction where little or no tax breaks are allowed. If you want to start a business all you have to do is first, have the desire to go in business, choose something that you have expertise or interested in and seek economic gain. It’s that simple, if you seek profit from your business and not just in business for the tax benefits, the Profit Motive requirements are positive.
Now that you have defined your business and seeking profit, look now at your new business and understand that you do not have to show a profit for the first two years. (A narrow exception to this rule applies to horse breeding, training, showing, for these activities, a presumption of a for-profit activity arises if income exceeds deductions in two out of seven consecutive years.) The IRS requires profit three out of five years but for the first two years no profit is actually required. Do remember business deductions must be ordinary and reasonable relating to your business.
But for now a name is needed for the business. Consider how you want people to identify with your business and more important how you identify with your business choice. It’s all important.
For example, my business name is TaxMart. My business includes tax consulting, tax planning, tax preparation and online tax filing.
Time is definitely needed to choose a business name properly. It’s all about defining your business and of course meeting IRS requirements.
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| Author: Larrie Perkins, Tax Consultant and Founder of TaxMart Inc. Alabama USA
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