Hobby or Business Related Expense?

by | Jun 1, 2016 | Cracking the Tax Code with Christy | 0 comments

Ever thought to yourself that you might like to be in business?  Chances are, you probably already have been at some point in your life, at least in one form or another.  Mown a lawn for cash?  Business.  Babysat for pay?  Business.

What you’ve done is work as a sole proprietor, maybe without even realizing it.  And there’s a few advantages to that:  the sole proprietor doesn’t have to worry much about anybody else’s approval, except, of course, the customer’s.  You’re your own boss.  Except for taxes, you get to keep whatever profits the business makes all for yourself.

But you also have to face the responsibilities of being a business owner all by yourself as well.  And those risks are huge.
As a sole proprietor, you are totally and personally liable for any mistakes made on the job by you and your employees. Also, and this is a biggie, so brace yourself:  employers pay 100% of social security and disability contributions on earnings (as an employee of someone else, you pay only 50%). There are other issues that will probably emerge as your business grows more and more successful.  Accurate bookkeeping and regular self-employment tax payments become crucial.  Increasingly complicated tax issues could lead to an IRS audit.

While many business advisors will tell you that the sole proprietor doesn’t need legal advice for the business, it’s extremely important to retain counsel.  Sound guidance can help you avoid the inevitable pitfalls that crop up along the way to financial viability as a sole proprietor.

A partnership is a lot like a sole proprietorship, in that you can be engaged in one without even fully recognizing it, so consider carefully whether your activities constitute a partnership.

If you and your friends have been baking cakes in your home, and word gets around that you’re the ones to call for helping out with a party, and you start charging a little here and a little there for your product . . . you’ve been conducting business as a partnership.  You don’t have to be formally organized to be viewed as a partnership by state law or the IRS.

And no matter how delicious that cake is, by baking it with friends and selling it, you’ve just placed yourself at risk.
Remember:  in Alaska and Texas, laws do not favor partnerships.  Fallout for unwitting participants in partnerships is often swift and unpleasant.  Partners face unlimited (100%) personal liability for damages caused by any of the partners in relationship to the business. Since the law does not require partnerships to have legally binding agreements in writing, disagreements among partners often undermine profits and render every partner vulnerable.  Sticky problems can develop regarding taxes.  To remove the obstacles certain to block business growth, you might eventually find yourself paying big bucks to accountants and attorneys.

So if you think you may unintentionally be engaging in business as either a sole proprietor or a partnership, call me to put into place safeguards that will protect both you and your family from personal liability.