Home-based Business. What if I have next to nothing coming in for how much I am deducting in taxes?

rothchristian asked:

I am looking into setting up a home based Business as a part time thing. I have a day job and I would like to do this music endeavor on the side. I want this to be legitimate but I know I will be making very little money and writing off a lot in tax deductions. Does anyone have experience in with this type of scenario? Is there a reasonable expectation that IRS has around how much revenue needs to come in for how much you are writing off? I don’t want the Business to appear fraudulent although I have more to gain from a tax deduction basis.

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3 Responses to “Home-based Business. What if I have next to nothing coming in for how much I am deducting in taxes?”

  1. PepsiLime Says:

    The IRS knows that a business has to experience growing pains, but they have a rule that for a business to be considered a legitimate business rather than a hobby, it has to make a profit in 3 out of 5 years. And in your case with you saying that this is going to be something on the side, you would be walking a very fine line with the IRS after your second year. I have included info regarding “hobby loss”

  2. Mathew Says:

    The rule is that a business should make a profit in three of any five years. That is not closely followed! When the IRS does look at a business that has lost money for some time they are looking at the efforts being made to conduct the business in a manner that would produce a profit. empirically they are less concerned about such a part time business when the individual is making a substantial taxable income and this “side” business is not used solely to cover that income.

  3. Judy Says:

    It won’t appear fraudulent, but would probably be considered a hobby rather than truly a business. From what you’ve said in your question, it would fit the definition of a hobby, so the most you could deduct in expenses would be the amount of your income. If you try to deduct large sums against your regular income, it would be disallowed and you’d end up paying back the extra taxes plus penalties and interest.

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