Can Any Small Biz Owners Explain Why I Should Retire if I Can Write Off So Much?

[GrayHare]

My understanding of the tax law is a non-hobby business must have a "profit motive". AFAIK the simplest way to demonstrate a profit motive is by showing profits in 3 of every 5 years. I believe the IRS will accept other evidence also of profit motive, though I do not know examples.

 

[Cheesehead]

Yes I just discovered that on their website:

"The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year"


From:
Business or Hobby? Answer Has Implications for Deductions

I will report back next week when I find out from my CPA how this applies to my trying to break even doing non-profit videos in "retirement" and if the IRS would let me deduct. If it's not possible, or I lose money, then I might as well just fold up the tent and be truly retired.

 

[target2019]

Yes I just discovered that on their website:

"The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year"


From:
Business or Hobby? Answer Has Implications for Deductions

I will report back next week when I find out from my CPA how this applies to my trying to break even doing non-profit videos in "retirement" and if the IRS would let me deduct. If it's not possible, or I lose money, then I might as well just fold up the tent and be truly retired.

There are two possibilities when you do work for a charity. It sounds to me like you do this work for a reduced rate, or none at all. If you submit a bill and receive payment, you are still in business. I have one client, a smallish charity, for which I perform work. I submit a bill and receive a check. All expenses are counted in my small business.

If you do not bill the charity, then you cannot write off the value of your work. However, you could officially donate your work to the charity, and receive acknowledgment. The value of this donation is where you might set off triggers in the IRS computers.

One very important facet is whether they are indeed a charity. If they are not in the IRS list...

In your case, it sounds like you will do substantial charitable work for some real charities. Getting a read from your CPA is a very good start.

 

[Cheesehead]

I have a killer resume after 33 years in the biz, now I am working on my obituary!

 

[sheehs1]

My understanding of the tax law is a non-hobby business must have a "profit motive". AFAIK the simplest way to demonstrate a profit motive is by showing profits in 3 of every 5 years. I believe the IRS will accept other evidence also of profit motive, though I do not know examples.

+1

IRS is o.k. if you can show you are trying to make a profit. I know a business that has been trying to make a profit for over 10 years. They have employees, sales...etc.
The problem comes in with home based businesses....that don't show any employees...or other overhead associated with non home based businesses.

 

[rothlev]

My understanding of the tax law is a non-hobby business must have a "profit motive". AFAIK the simplest way to demonstrate a profit motive is by showing profits in 3 of every 5 years. I believe the IRS will accept other evidence also of profit motive, though I do not know examples

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__________________

The fact that the taxpayer carries on the activity in a businesslike manner and maintains complete and accurate books and records may indicate that the activity is engaged in for profit. Similarly, where an activity is carried on in a manner substantially similar to other activities of the same nature that are profitable, a profit motive may be indicated. A change of operating methods, adoption of new techniques, or abandonment of unprofitable methods in a manner consistent with an intent to improve profitability may also indicate a profit motive.​

Example: The court ruled a taxpayer's model railroad activity was not entered into for profit. The taxpayer commingled personal and business funds in his checking account and the business records were not separate from his personal records. (Lencke, TC Memo 1997-284)

A series of losses during the initial or start-up stage of an activity may not necessarily be an indication that the activity is not engaged in for profit. However, where losses continue to be sustained beyond the period that customarily is necessary to bring the operation to profitable status, such continued losses, if not explainable as due to customary business risks or reverses, may be indicative that the activity is not being engaged in for profit. If losses are sustained because of unforeseen or fortuitous circumstances that are beyond the control of the taxpayer, such as drought, disease, fire, theft, weather damages, other involuntary conversions, or depressed market conditions, such losses would not be an indication that the activity is not engaged in for profit.
Appropriate losses in the start-up phase of a business do not necessarily indicate a lack of profit motive. The amount of time necessary to reach profitability varies with the type of activity. Farming, inventing, and artistic activities are some examples of enterprises where diligent effort over a long period of time is often necessary before profits are made.​

Example: A taxpayer spent considerable time promoting her musical career. Her efforts to secure contracts were consistent, with a profit motive. The court ruled that losses were incurred in the start-up stage of a speculative business and were not sustained beyond a reasonable period of time. (Krebs, TC Memo 1992-154)​

 

[Texas Proud]

Hi Texas Proud,

The car I write off is a van that carries equipment, totally business, beat to hell, I keep a mileage log of what job uses what miles. We have a separate car for our personal use. Parking downtown is $30 at least. We have a regular cell phone, the smart phones are all biz. Since I am in an electronics business most everything I get at Radio Shack is for work and justifiable. I need to build a lot of rigs and supports so I am in Lowes a lot. I keep meticulous receipts.

That's why I wanted just small business owners to respond...

Thanks for saying....


OK, then if all expenses are for business.... then they all go away if you stop working... so keeping a business going so you can keep expenses going seems a bit strange.... that is if you want to retire...

 

[Texas Proud]

Jeez, you think you could make any more assumptions and accusations against the OP? Not only do you have a lot of "if you do this" statements, but you conclude for yourself that he does indeed do some or all of these things and is cheating on taxes. Nice. How can you possibly know these aren't all legit?

To the OP, sounds like you can pick and choose more worthwhile and low-stress projects and keep doing what you love. Maybe take enough paying jobs with the charity work to break even. Why give up something you love doing?

Most all the people I know that run their own business who talk like the OP is taking personal expenses as business.... and he seemed to be saying as much... he has since said it is not... so I believe him....

See my post to him for my answer....

 

[Texas Proud]

I think it has been addressed concerning a profit motive.... but let me give an example (even though it was a long time ago)....


One of my clients was very very rich.... he bred animals... he had workers etc... he had income in the $5 million range.... but his expenses were close to $10 million per year.... when he was audited, they said he was not doing the activity as a business as he was not trying to make a profit...

However, as someone else has mentioned, there have been many examples of a company losing money for many years, but they were being run to try and make a profit... an example of this would be Amazon.... it lost money for a long time, but nobody would have ever said it was a hobby....

 

[pletal]

Sounds to me that you got lucky in your audit....

IOW, having a car for business and using it for anything else means you do not get to write off the personal use...

Having a cell phone and using it for anything but business means you do not write off personal use...

If you go downtown and park for personal business.... guess what, you are not supposed to write it off...

I have no idea what you are writing off from Radio Shack and Lowes, but if it if for personal use, again, not supposed to write it off....


So, I do not think you are as legal as you claim...



As far as your original question.... why do something that is high stress to take tax write off you should not.... why not start a low stress business and do the same thing....

I am going on a cruise , along with my wife, my accountant, and his wife. Is it a write off if we talk about my taxes?

 

[Spanky]

I am going on a cruise , along with my wife, my accountant, and his wife. Is it a write off if we talk about my taxes?

Sure- as long as IRS does not audit you.

 

[kumquat]

I am going on a cruise , along with my wife, my accountant, and his wife. Is it a write off if we talk about my taxes?

Not if he pays. If he doesn't, why is he there?

 

[Gill]

OK, then if all expenses are for business.... then they all go away if you stop working... so keeping a business going so you can keep expenses going seems a bit strange.... that is if you want to retire...

Which leads one to believe that not all the expenses are truly business expenses.
Bruce

 

[target2019]

The OP has described some of his expenses. He uses a CPA, and has been audited by the IRS. He understands the bounds.

 

[Rickt]

Running a business to get write-offs is unacceptable to me. I run the business for the ROI and intend to run it until I retire in 5 years. At that time I will sell it because I would not want any opeartional headaches of operating the business and then go on to enjoy my retirement. Having a hotel, I do get to write off a lot of expenses and also have the advantage of depreciation that comes with owning real estate, but once I retire I want to be free and that's the reason I will sell it.

 

[Cheesehead]

But Rickt,

I am not talking here about running a hotel or working the cubicle of a megacorp or slaving away in the salt mines, I am talking about keeping the biz I love doing running minimally enough to create videos that help charities and also because it will keep me sharp and active physically. I will still consider myself "semi" retired at 62 since it will be much easier and slower than what I do now commercially. I don't think the non-small biz owners realize this is a 60 hour a week endeavor, running your own show.

I am one of the few that are blessed to do something that I love so to me it's not really going to work, it's just that at 62 I know I can't keep up this pace so I want to go from commercial (difficult) to non-profit (easier), which I will consider "semi" retirement, yet need to have the write offs (deductions) to not take a loss.

Yes, I survived an audit, no problems. Records and receipts are what counts. I can tell many respondents have not run a small service business and then started to slow it down in a glide path into retirement...Seems all the non-small business owners think deductions are just a tax scam?

What I was hoping to receive here is advice from others like myself as to how to transition to a soft or semi-retirement doing "break even" charity work, yet keep the write offs so it doesn't end up becoming a loss. I would assume that when one winds down the business but keeps it going enough to do a few projects for non-profits, the idea is not to lose money, correct? Yet I'd like to use my skills to help worthy causes. This site seems to be about growing the nest egg, not losing money, correct? Has no one asked this question before? Perhaps this is the wrong site to ask advice about keeping the biz up after 62 since everyone here has folded their tent and are just managing their investments?

So I repeat: Please respond only if you have throttled down a small service business in retirement, yet kept it open to the point where you could function servicing charities (yet not lose money), and have the write offs to make sure you break even. Or if you're a CPA I'd love your advice. So, if you haven't done that, meaning run your own service business like I have for 33 years, your advice isn't helpful. And as I said, this week I will run the options by my accountant and report back.

Many thanks

 

[youbet]

This may be a question for the CPA?

Yes, that's correct.

 

[sheehs1]

Cheesehead, Your question is a good one and perhaps some others will weigh in or your CPA can give you advice. As it is I ran this by my husband who is a CPA . But of course we do not have all of your specifics.

I think you have most of your answer, which is you need enough revenue to be able to write off your expenses without taking a loss (since you said you didn't want to take a loss and since the IRS may not allow after a certain number of years).

What that means to you is your decision. Meaning, how much revenue and how many commercial jobs that may mean to achieve that and/or is that acceptable to you in your scale back mode.

It will be interesting to know if your CPA, since he knows your business more intimately, has other advice or recommendations.

No...I have not scaled down a business. We (my siblings and I) are still running it. We have 60 employees so not the type of small business you are talking about, but a small business none the less.

 

[Cheesehead]

Thanks sheehs1. Now that's a meaningful response. Appreciate it.

 

[Gumby]

Please respond only if . . .

Good luck with that.

 

[Cheesehead]

Yes Gumby I agree, this is a different type of site...

 

[pb4uski]

You can throttle down.... you'll just need to carefully manage your revenues so as to show a slight profit occasionally to avoid the risk of the IRS trying to characterize your business as a hobby rather than a business. An easy way would be the charge the non-profits that you do work for so that over the course of a year your business generates a small profit. If you did that you would essentially be charging them your costs and providing your "labor" for free. Or you could do an occasional commercial project and have the profit from those commercial projects offset the losses on the non-profit projects. You have a lot of flexibility as to how to design it, as long as the business occasionally generates a profit.

 

[Cheesehead]

Thanks pb4uski,

I usually donate my labor and equipment and just charge them my true hard costs such as, Fed Ex, freelance crew members (who usually give a charity discount), etc. The really large national non-profits only expect a discount but I prefer to help small charities where my effort is meaningful. The large ones with budgets in the tens of millions, my efforts don't even move the needle. However, the local small charities are very appreciative but usually need the whole project for free.

Maybe the whole thing is a pipe dream, will find out soon from the accountant. There is no shortage of non-profits calling me though, I just have to space them out.

Thanks

 

[Texas Proud]

You can throttle down.... you'll just need to carefully manage your revenues so as to show a slight profit occasionally to avoid the risk of the IRS trying to characterize your business as a hobby rather than a business. An easy way would be the charge the non-profits that you do work for so that over the course of a year your business generates a small profit. If you did that you would essentially be charging them your costs and providing your "labor" for free. Or you could do an occasional commercial project and have the profit from those commercial projects offset the losses on the non-profit projects. You have a lot of flexibility as to how to design it, as long as the business occasionally generates a profit.

+1


Cheesehead... I think you know the answer.... you have basically put it down yourself... I do not see any other answer than what has been given to you.... if it is a legit business, there is a profit motive.... lacking that it is not a business...


IF you want to do this for charities and not run a business that makes a profit (which is implied in your posts), then just write off the expenses as a charitable donation.... if you are keeping good records it should not be a problem (except for the home write-off)...

 

[Cheesehead]

Yeah you're right. Making videos (the high quality variety) is such an expensive endeavor there's really no way to have the IRS consider it a biz if it runs at such a loss, which it will unless I keep at lot of the commercial clients, in which case I'm not really retired am I?.

I know what my CPA will say. But perhaps he will have an idea...