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Thread: Tax deductions?

  1. #11
    darr's Avatar
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    Re: Tax deductions?

    OK, I read the article. I can see a few gray areas that would concern me enough to get further advice. If you are serious about taking this route, I would spend the time and money and have a professional (lawyer, accountant, etc.) help you design a business plan. There is more to running a business than the few little snippets the author talked about. Think of it like this, if it was that easy (as the author states), wouldn't there already be a LF workshop you could attend that would sell/teach this idea? If there is, I have never heard of it and the LF workshop market is always looking to add more interesting concepts to their menus. Brian Ellis should hold a business workshop at the LF Conference. How about it Brian?

  2. #12

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    Re: Tax deductions?

    "Currently small businesses can deduct right off the bat up to $100,000 of capital expenses rather than depreciate it. However, apparently as of 2008, this falls to $25,000 -- which is still plenty enough"

    That's the Section 179 deduction to which I referred earlier.

    "First you needn't be "in the business of photography" per se - it is sufficient to be in A business (any business) that INVOLVES photography. Your photography expenses need only be a "usual and ordinary" part of the business expenses, but you don't have to be working AS A PHOTOGRAPHER per se."

    That's correct, I didn't mean to suggest that you had to be a photographer to write off photography expenses. I was using the term "photographer" loosely because the assets to which you referred - Deardorff cameras, enlargers, etc. - are used by photographers and this is a photography forum.

    "Again, these aren't big hurdles. Keeping records is not so hard - a notepad with expenses/income is sufficient.

    Real businesses don't usually keep their records on notepads. You'll need to do better than that.

    "Second, I don't use the 'dorff for taking family snapshots so the "personal use" of LF gear is naturally practically non-existent"

    Good, just keep records showing how much "practically" means and you'll have no problem.

    "Third, what constitutes "business use" depends on how broadly you define your business in the first place."

    That's right, as long as the "business" as you define it is one in which you make or can reasonably be expected to make a profit.

    "So, if your business is "travel website" then the photos you take during your trip to China consititute business use and not personal use."

    That's true, as long as you can establish that your travel web site is one from which you can reasonably be expected to make a profit after deducting the cost of the trip to China and all your other expenses. And of course you'll need to show that your trip to China was an ordinary and necessary expense (e.g. that you had to go to China to get the photographs, that you couldn't have gotten essentially the same photographs from a stock agency) plus comply with a bunch of other rules relating to travel for business purposes.

    "The IRS can audit me all they want. That's the beauty of it - I'm not scamming the system; I'm enjoying the benefits of the tax system just as it was MEANT TO BE used"

    No comment.

    "One of the "rule of thumb" tests in determining whether you're engaged in a real business or merely a hobby is whether you make a profit at some time down the road (like in three years - no start up business is expected to make a profit the first year)"

    There's no rule that allows anyone to automatically deduct their first year "business" expenses just because it's a start-up. Normally by the time of your audit you will have been engaged in this activity for at least three years, often longer (assuming of course that you stay with it for that long) so you will have a history and a pattern that will be looked at. If it's determined that you weren't operating a business then the first year's losses will be disallowed along with any others that are within the audit period.

    "I didn't say that Uncle Sam would pay for ALL my LF gear - merely that he would pay for the cost of my 'dorrf - which is about 18% of my expenses"

    I don't think you understood my comment. Tax rates haven't yet reached 100%. So when you deduct the cost of something (e.g. your Deardorff) you don't recoup the entire cost of the item, you potentially recoup the taxes that you saved with the deduction, which depends on your tax bracket. If, for example, you're in a 20% bracket then for each dollar the Deardorff cost you save 20 cents in taxes. But you've still had to bear the burden of the remaining 80 cents out of your pocket, Uncle Sam isn't going to pay for that (unlike the situation with tax credits, where Uncle Sam does in fact pay for the entire cost).

    Cyrus, I'm not saying that your plan won't work. From some of your comments here I just think you're a little optimistic in your thoughts about how easy it is to just set up something that kind of looks like a business and thereby take tax deductions for trips to China, 8x10 cameras, etc. Remember, it isn't up to the IRS to prove you're NOT in a business. All they have to do is claim you're not. After that the burden is on you to prove you ARE engaged in a business. In my years as a tax lawyer representing horse breeders, art "dealers," and sports car owners and drivers who claimed they were engaged in a business, I've learned that isn't such an easy burden to meet.
    Brian Ellis
    Before you criticize someone, walk a mile in their shoes. That way when you do criticize them you'll be
    a mile away and you'll have their shoes.

  3. #13

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    Re: Tax deductions?

    Quote Originally Posted by Brian Ellis
    "Again, these aren't big hurdles. Keeping records is not so hard - a notepad with expenses/income is sufficient.

    Real businesses don't usually keep their records on notepads. You'll need to do better than that.
    Not really. The IRS is looking for evidence of a profit motive. They don't care if you're using a 10 million dollar accounting software package or whatever. You just have to somehow keep track income/expenses. For several generations before computers, people used notebooks and pencils.


    And of course you'll need to show that your trip to China was an ordinary and necessary expense (e.g. that you had to go to China to get the photographs, that you couldn't have gotten essentially the same photographs from a stock agency) plus comply with a bunch of other rules relating to travel for business purposes.
    WHile it is true that the expense has to be ordinary and necessary, you don't have to show that there was no less-expensive way of doing it. It just has to be ordinary and necessary, not the most cost-effective.


    There's no rule that allows anyone to automatically deduct their first year "business" expenses just because it's a start-up. Normally by the time of your audit you will have been engaged in this activity for at least three years, often longer (assuming of course that you stay with it for that long) so you will have a history and a pattern that will be looked at. If it's determined that you weren't operating a business then the first year's losses will be disallowed along with any others that are within the audit period.
    Yup. Agreed. In fact you don't have to produce a profit at all (in the first, second, third, whatever year) -- as long as you had a profit motive. My point was that as long as you have the profit motive they can't go back and disallow the deduction just because you never managed to actually produce a profit. You're not punished by the IRS for not becoming successful.

    "I didn't say that Uncle Sam would pay for ALL my LF gear - merely that he would pay for the cost of my 'dorrf - which is about 18% of my expenses"

    I don't think you understood my comment. Tax rates haven't yet reached 100%. So when you deduct the cost of something (e.g. your Deardorff) you don't recoup the entire cost of the item, you potentially recoup the taxes that you saved with the deduction, which depends on your tax bracket. If, for example, you're in a 20% bracket then for each dollar the Deardorff cost you save 20 cents in taxes. But you've still had to bear the burden of the remaining 80 cents out of your pocket, Uncle Sam isn't going to pay for that (unlike the situation with tax credits, where Uncle Sam does in fact pay for the entire cost).

    That's right but you misunderstood what I said too. I realize that my total LF expenditures won't be recouped. I don't expect to be credited with the full expense of my dorf. However, since i spent a lot more for LF than just on my 'dorff, then my expected tax refund will be a sum equivalent to what I paid for my 'dorff. Thus, in effect, my 'doff is paid for by my refund. Which is still mighty cool.

    Cyrus, I'm not saying that your plan won't work. From some of your comments here I just think you're a little optimistic in your thoughts about how easy it is to just set up something that kind of looks like a business and thereby take tax deductions for trips to China, 8x10 cameras, etc. Remember, it isn't up to the IRS to prove you're NOT in a business. All they have to do is claim you're not. After that the burden is on you to prove you ARE engaged in a business.
    Heh. Guess my own law degree will come in handy.

    I defer to your greater experience but the burden to show that I am in a business rather than a hobby doesn't seem so terrific. I'm not suggesting that anyone should set up something that merely "looks like" a business - I am only saying that setting up a REAL business is not so hard and it can quite legitimately be something you enjoy doing like 8x10 photography and trips to China. In my case, I am operating as a DBA, have a trademarked business name, printed up business cards and stationary, have a revenue stream (and actually do expect a tiny profit this year!) and I keep records of my income and expenses. That's seems sufficient to show a profit motive. Based on your experience, what else would be needed?

  4. #14

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    Re: Tax deductions?

    Quote Originally Posted by darr
    Think of it like this, if it was that easy (as the author states), wouldn't there already be a LF workshop you could attend that would sell/teach this idea?
    I don't know about LF workshops but there are plenty of workshops on home or side- businesses in general (though of course there are a lot of "get rick quick" scams too.) Like I said, there's no law that says a legitimate home- or side-business can't involve something you enjoy doing, like LF photography. If you can include your LF photography into a legitimate side business in which you fully intend to make a profit, then the expenses associated with your LF photograhy are deductible as are the rest of your business expenses. It is that simple. That's the law, and its in your favor. That's how it was intended to be. Its not a scam, its not a "loophole" and you shouldn't be hesitant to do this out of fear of the IRS.

    And of course you should always check with your lawyer or CPA, there's no harm there (esp. since the cost of seeing the lawyer and CPA to set up a business is also deductible!)

  5. #15

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    Re: Tax deductions?

    This has been a very interesting discussion, especially considering that principal participants are lawyers. I really appreciate the information and the intelligently stated points of view.

    I'm envious of you, Cyrus, because if I could I would do similar. As I said earlier, I tried that earlier in life and found that I don't moonlight very gracefully. Right now I'm not free to change careers, nor do I have even a fraction of the time required to run a side business with real profit motive.

    Have you considered SBA as a source of funding to provide you some start-up funding? It seems like everybody-and-their-brother uses SBA to buy the corner mini-mart (or whatever) and ANYONE can get into business.

  6. #16

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    Re: Tax deductions?

    Producing income every year will not cut it with the IRS. You will have to show a taxable profit within the first 3 years or run a very good risk of being audited. And as others have pointed out you need to demonstrate you are seriously persuing making a profit. Such as carrying a secured debt to fund the business, business plan, employees, advertising, belonging to professional groups, have a seperate business location from your home, forming a corporation as opposed to sole proprietorship, etc.

    Nothing wrong with starting a side business and taking advantage of the tax laws that can work in your favor. But operating at a loss in perpetuity will not work.

    I know 2 people who have run afoul of the hobby loss rule, one with an auto-customizing business and the other with photography. They both thought they could operate without a taxable profit if they showed income close to expenses. They both paid back taxes of a couple thousand dollars.

    The interesting thing is both of them could have probably limited the amount of expenses deducted the second or third year and thus moved income over the profit line and avoided the audit. But greed blinded them to the realities of dealing with the IRS.
    Last edited by Jim Chinn; 9-Aug-2006 at 12:26.

  7. #17

    Re: Tax deductions?

    "Based on your experience, what else would be needed?"
    Me thinks it might be... surviving your first IRS audit.

  8. #18

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    Re: Tax deductions?

    Yes, go for it. But, talk to your tax accountant, please. I have sold images, not many, but I have sold some. Also, my wife sells jewelry and sometimes we combine expenses under one LLC, especially, if photography is used in taking photos for marketing and advertising purposes. Be realistic in expenses and make efforts to sell product.

    We have several LLC's set up for business purposes. So proper documentation is in order. It's inexpensive in Arizona and protects you as a business owner. Again, talk to your tax accountant but I would encourage you to do so.

  9. #19

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    Re: Tax deductions?

    Quote Originally Posted by BrianShaw
    This has been a very interesting discussion, especially considering that principal participants are lawyers. I really appreciate the information and the intelligently stated points of view.

    I'm envious of you, Cyrus, because if I could I would do similar. As I said earlier, I tried that earlier in life and found that I don't moonlight very gracefully. Right now I'm not free to change careers, nor do I have even a fraction of the time required to run a side business with real profit motive.

    Have you considered SBA as a source of funding to provide you some start-up funding? It seems like everybody-and-their-brother uses SBA to buy the corner mini-mart (or whatever) and ANYONE can get into business.
    Hi
    I have to say that I am not a lawyer in whatever state you're in so nothing here should be interpretted as legal advice, and if anyone needs legal advice they should seek out a lawyer or accountant licensed to practice in their jurisdiction.

    Runnign a side business does take time but the internet has really made things easier. I know someone who is making a KILLING on the web!

    No, My investment and expectations in this venture are too small to to justify going to the SBA.

  10. #20

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    Re: Tax deductions?

    Quote Originally Posted by Jim Chinn
    Producing income every year will not cut it with the IRS. You will have to show a taxable profit within the first 3 years or run a very good risk of being audited.
    This mixes up two issues: the standards for being audited, and the standards for being a legitimate business.

    You could indeed be audited if you're having too many expenses and not enough profit. But an audit is not a punishment. There shouldn't be anything particularly scary about an audit if you have your paperwork together and have your receipts.

    You don't have to show a profit to be able to legitimately deduct your business expenses - as long as you're in a business and not a hobby. Since I meet that requirement, then they can audit me all they want. There are lots of people who actually do make a profit on their hobby - and there are lots of people who make a loss on their business. Profit or loss is not determinative.

    And as others have pointed out you need to demonstrate you are seriously persuing making a profit. Such as carrying a secured debt to fund the business, business plan, employees, advertising, belonging to professional groups, have a seperate business location from your home, forming a corporation as opposed to sole proprietorship, etc.
    While these things are nice, they're not necessary to prove that you're in a business. Getting a secured debt is certainly not required, a business plan is not required (they're mostly a joke anyway -anyone can bang one out in 20 minutes) having employees is certainly not required, a separate business location is certainly not required, and lots of perfectly legitimate businesses are run as DBAs rather than corporations - but even then setting up your own LLC is not too difficult.

    Nothing wrong with starting a side business and taking advantage of the tax laws that can work in your favor. But operating at a loss in perpetuity will not work.
    No one wants to operate at a perpetual loss, but the test of whether you're in a business or merely running a hobby does not depend on making a profit in three or five years, and there are plenty of tax court decisions which back that up. Your friend wasn't required to pay backtaxes because he didn't make a profit - he was required to pay back taxes because he wasn't able to show that he was running a business.
    To be running a business you have to be able to show subjective intent of making a profit - you don't have to actually produce a profit. Lots of businesses fail to do so, but they're still businesses and treated as such by the IRS.

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