Tax deductions?

[cyrus]

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.

Thank you.

LLCs are nowdays quite popular and relatively easy to set up. I encourage people to do it - but its not necessary in order to be a business. It has certain benefits (ie: protecting your personal assets, in case your company gets sued) and nowdays I think practically every state recognizes single-member LLCs (used to be that two or three people were required to set one up.)

Honestly, I thought more people on this forum would have taken advantage of the side business tax benefits!

[Frank Petronio]

So who is the person making a "KILLING" on the web and what are they doing special?

[cyrus]

So who is the person making a "KILLING" on the web and what are they doing special?

Well I don't want to name her specifically!
She has a travel-related site which earns commissions from hotel reservations, cruises, sale of travel-related books, contextual ads, etc. etc. I have some photos pn the site. She comes from the particular region which is covered by her site, so she knows a great deal about the area and her web site is quite content-rich. The area is also becoming a "hot" travel destination & her site has become sort of an "authority site" with an active membership of people in a certain age group. Mind you, it took years of work - mostly a labor of love. But it has started paying out quite handsomely - she's quit her 9-5 and works on the site exclusively & is doing quite well. As I understand it, while hardly every such website can become a success, it isn't rare either. There's another guy who has a site about venice which has become quite popular: See

www.powerhomebiz.com/vol129/durant.htm

Point is, she enjoyed making the site and would have worked pretty much just as hard at it regardless of the income generated, so it was successful. Lots of others who tried to earn a quick buck failed and quit.

[Wayne]

I believe Cyrus is right on most of this. FWIW, I claimed by photography as a business for several years, most of which I suffered big losses. My one year of profit was very small, and only existed on paper because I didnt take deductions that I was entitled to. I wasnt audited (YMMV!). Why did I do it? Because despite knowing that I wasnt doing anything wrong, I was terrified of the prospect of an audit. The reason for the fear was my uncertainty as to what the IRS could consider "intent of making a profit", and I didnt have enough income from other sources to afford a fight. I'm also not a lawyer. I agree entirely that notebooks, seperate accounts, seperate places of business, and whether a profit is made or not are (almost) entirely beside the point when it come to the IRS.

The important question is, how does the IRS define a reasonable "intent and attempt (because intent alone isnt enough) of making a profit"? Obviously if you cant show any attempt to market your work, you are asking for big trouble, So my question is, how much marketing, and what kinds, are enough to satisfy the IRS? Is having a website enough? If not, what is? Obviously you could spend tens of thousands of dollars per year advertizing and promoting your work, but is the absence of such major effort enough to trigger an audit? How much is enough? The uncertainty and subjectivity of this area is what stopped me. After all, unless you can afford a legal fight the IRS gets the final word.

Wayne

[cyrus]

I believe Cyrus is right on most of this. FWIW, I claimed by photography as a business for several years, most of which I suffered big losses. My one year of profit was very small, and only existed on paper because I didnt take deductions that I was entitled to. I wasnt audited (YMMV!). Why did I do it? Because despite knowing that I wasnt doing anything wrong, I was terrified of the prospect of an audit. ..

The standard is whether there is a subjective profit motive - whether you intended to make a profit. This is determined by the IRS by a variety of factors. For example, as Brian mentioned, they'll check your income/loss patterns of the last few years. During these years, if you've managed to gradually increase your income (or better yet, even made a gross profit!) then that helps prove you're in a business.

Having a separate office, hiring people, spending money on advertising etc are all also good indicators of a business over a hobby. So is setting up a book-keeping system (which doesn't have to be terribly complicated) consulting an attorney and a CPA to help set up your business, trade-marking your business name and registering as a corporation or a DBA, and spending a lot of personal time on the business. Installing a separate phone line, starting a website, business cards and stationary etc etc.
All of these are things that a REAL business would be expected to do - these are all indicators of running your business in a "business-like manner".

Anyway, while working as a photographer may result in consistent losses, as I said, there are so many other businesses that INVOLVE photography (and so involve photography-related deductions) which CAN BE PROFITABLE. A small side business can be profitable in 5 years because the costs of small side-businesses are low, and the second-third-fourth year expenses are lower than the first year expenses (since you've made one-time big purchases, like a camera, in your first year.)

For example, lets say a travel-related website business has a startup cost of $3000, and a yearly cost of $1500 to operate. If you make $1501 in that second year, you've made a profit! And if you're making a profit, then that's one less reason to have to worry about being reclassified as a hobby.

Anyway, see your lawyer/accountant & read something like this:
http://www.writersweekly.com/this_we..._12142005.html

[cyrus]

Anyway, see your lawyer/accountant & read something like this:
http://www.writersweekly.com/this_we..._12142005.html

Sorry, I meant something like this:

http://www.nysscpa.org/cpajournal/old/14345325.htm

[darr]

Because despite knowing that I wasnt doing anything wrong, I was terrified of the prospect of an audit.

Just a side note about having gone through an IRS audit: my business was not what triggered the audit, it was my husband's employer. He works for one of the largest airlines in the US (employs over 300,000 worldwide), and the IRS did not like the way the accounting was performed on the pilot's per diem. The IRS was kind enough to tell us at the start of the audit what triggered it, but also explained they would be auditing everything on our return. So your side business could also be pulled in for an audit because of what your main income looks like as well.

[Brian Ellis]

"For example, lets say a travel-related website business has a startup cost of $3000, and a yearly cost of $1500 to operate. If you make $1501 in that second year, you've made a profit!

But if you're making a profit where's the big tax advantage? I thought your idea was to offset losses from the travel web site against income from your job. If you earn a profit from the web site that's great but then you don't have losses to offset the income from your job, in which case the whole tax advantage of the web site disappears.

[darr]

Did I tell you how much I love the idea that Uncle Sam will pay for the Deardorff I bought this year for my side business?

Welfare and tax deductions are not the same thing, but the "intent" in this scenario would like to make them an equal outcome.

[cyrus]

But if you're making a profit where's the big tax advantage? I thought your idea was to offset losses from the travel web site against income from your job.

Good point!
Well, I suppose if I actually do make a profit from running a hypothetical side business that also happens to be something I enjoy doing, then I don't mind not being able to offset the loss especially after the first year when I'll be spending the most on one-time large purchases and will need the deduction.

Heck I would hope to earn enough from such a side biz to quit the day job altogether (not likely - health benefits are hard to replace.) In the meantime however, if & until I do make a profit I would indeed like to take advantage of the tax benefits that I'm entitled to have esp. on the first year. And not all years will necessarily be profitable years.

BTW people have been asking me about this travel site thing. That's not my personal idea, it was an example. Basically my friend started a site to show & try to sell her paintings of this particular place, and she wrote a couple of little side articles about the history, tourism and hotels available at this place. Her articles and her site were indexed by Google. People who were planning trips there stumble upon her site when checking Google, and things grew naturally from there. That's all. Oh, and she has a nice, relevant domain name because she did this so long ago. It was a labor of love. There was no business plan or tax planning or anything like that until she was seriously into earning an income from the site. I don't want anyone to think that running one of these sites is a get-rich-quick option, nor do I want anyone to think that the tax benefits of a side business (a LEGITIMATE side business not a hobby) is a "loophole" or some sort of an shady "accounting trick".