View Full Version : Tax deductions?
Just curious - how many US-taxpayers here who do photography as a "side business" in addition to their regular day jobs have been deducting their photography-related expenses from their income taxes? I am just now acquiring the most expensive bits of my LF gear for my new photography-related side business (a travel-related photography site). I have bought most of my 8x10 stuff this year, and have been travelling for my side business too. Considering how much income taxes I pay from my regular job, I am looking forward to deductions this year. Are there any special deductions you've encountered that I may miss or any other pointers? Problems with the IRS? Etc?
I'm really surprised at the number of people who don't realize how easy it is to go into a side business and deduct most of their Ebay purchases as business expenses. That's money that would have otherwise gone to Uncle Sam anyway, so it might as well go for a new lens, enlarger, business website etc.
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?
Brian Ellis
9-Aug-2006, 00:07
Apart from anything else most of the things you mention purchasing (Deardorff camera, lenses, enlargers) are capital expenditures, not current expenses, and are depreciated over a period of time rather than being currently deducted, unless they're eligible for a special election under Section 179 of the Internal Revenue Code. IIRC used property (such as the Deardorff) isn't eligible for that election though I could be wrong, it's been a while since I looked at Section 179.
Second, in order to be able to even depreciate that type of property you have to be able to show that you're engaged in the business of photography and either earn a profit from it or be able to show that you have a reasonable expectation of earning a profit. In other words, you have to operate like a real business from which you can reasonably expect to earn a profit. And even then, if you use your new Deardorff or anything else for both personal and business purposes then you'll have to keep records showing the degree of business use vs personal use and only the portion of the cost allocable to business use will help you from a tax standpoint. Travel expenses have their own set of rules that I won't go into here.
And you should be aware of the fact that Schedule Cs (the form you'll probably use to report your income and expenses from this sideline) showing little or no income and big deductions, especially in areas such as photography that are susceptible of being enjoyed as hobbies, are one of the classic red flags that tend to generate IRS audits. So if you go this route make sure everything else on your return is squeaky clean because if you get audited the IRS isn't going to look only at your Schedule C, it will look at everything. And of course if you don't earn any income or if you generate only a little income relative to your deductions over a period of time you'll likely lose so then you'll get to pay not only the back taxes but also interest and penalties.
Even if you can show that you're engaged in a real business and even if you can show that all of your purchases were used 100% in that business you're wrong in saying that Uncle Sam will be paying for your new Deardorff (or anything else you buy). At the most Uncle Sam will pay the taxes you save by your deductions. Most likely that will be about 15% - 20% of the cost of things like your Deardorff. You'll likely still be paying about 80% - 85% of the cost even if everything else goes perfectly from a tax standpoint in your new side line. And if the Deardorff or other equipment, materials, supplies, etc. are used say 60% in your business and 40% for personal purposes then Uncle Sam will be paying a whopping 9% - 12% of the cost.
BrianShaw
9-Aug-2006, 06:22
I was partner in a small business throughout the 1980's. The business was so small that it was continually in threat of being considered a "hobby business" by the IRS. This was not the intention but it became a money pit due to reasons mostly beyond our control. Since we both had full-time jobs we didn't develop the business as much as we could have (should have). What Brian Ellis says is what I recall as being the story our accountant told. We showed financial loss most years but every third (I think) we needed to show profit otherwise IRS and/or the state revenue folks would shut us down. I had hopes of doing what I saw everyone else doing... buying an expensive car and plastering a magnetic sign on the side so it becomes a business deduction (read that "free car"). Accountant said we needed business income to have business deductions. He was right. My partner wrote off a room in his home as our corporate office. He was audited every year.
If you are not operating as a true business IRS can easily determine that. First they will want to see your business occupational license and sales tax certificate. Do you file your local/state tax forms monthly or quarterly? You will need to show bank records for a business account, not a personal one. Legally you should not mix personal funds and business funds together, thus the separate accounts. Are you incorporated or operating as a d/b/a? If operating as a d/b/a there are papers to be registered with the state that shows that (even operating under your real name must be registered) and of course if your are incorporated that is a completely different set of papers and tax forms.
I have been self-employed in graphics related businesses (photography is part of it) since 1985 and have been through one IRS audit. Since my business was setup legally from the start and we still employ the same CPA, we had no problem with the audit; it just took a bit of time and lots of paper for them to examine.
I will give you my 2 cents: it better be a legit business (receipts, invoices, local/state tax records, etc.) or you will pay a price for either being stupid or uninformed. IRS doesn't care about your intelligence level, they just want their tax money. You must show a profit once in five years. IRS cannot penalize you for being a lousy businessman, but they will classify you as a "hobby business" as BrianShaw explained above if you do not meet any of the typical business criteria. My advice is for you to spend the time and money and get sound business advice from a CPA. I can recommend ours in Atlanta if you are interested.
Apart from anything else most of the things you mention purchasing (Deardorff camera, lenses, enlargers) are capital expenditures, not current expenses,...it's been a while since I looked at Section 179. .
Thanks for the feedback!
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.
Second, in order to be able to even depreciate that type of property you have to be able to show that you're engaged in the business of photography and either earn a profit from it or be able to show that you have a reasonable expectation of earning a profit. In other words, you have to operate like a real business from which you can reasonably expect to earn a profit. .
This shouldn't be a problem. 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. (in fact, working only as a photographer is probably a losing proposition - however there are lots of better businesses which require some photography - businesses that are potentially more lucrative.)
Second, starting a business with the reasonable expectation of earning a profit (that happens to require photography) isn't all that hard.
For example, if you operate a business which consists of a Web site about travel to China, which naturally requires obtaining photographs of China, then the expenses associated with obtaining those photographs are deductible because they're a usual and ordinary business expense. You can hire a photographer to get the photos - or you can go to China and take them yourself. If you also happen to actually ENJOY visting and photographing China, that doesnt' mean that its not a business! And there's a perfectly good reason to expect to make a profit from such a venture eventually - which is why millions of people start website businesses everyday.
And even then, if you use your new Deardorff or anything else for both personal and business purposes then you'll have to keep records showing the degree of business use vs personal use and only the portion of the cost allocable to business use will help you from a tax standpoint. Travel expenses have their own set of rules that I won't go into here.
Again, these aren't big hurdles. Keeping records is not so hard - a notepad with expenses/income is sufficient. Second, I don't use the 'dorff for taking family snapshots so the "personal use" of LF gear is naturally practically non-existent. Third, what constitutes "business use" depends on how broadly you define your business in the first place. So, if your business is "travel website" then the photos you take during your trip to China consititute business use and not personal use. And the travel expense deductions are quite generous.
And you should be aware of the fact that Schedule Cs (the form you'll probably use to report your income and expenses from this sideline) showing little or no income and big deductions, especially in areas such as photography that are susceptible of being enjoyed as hobbies, are one of the classic red flags that tend to generate IRS audits.
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.
And of course if you don't earn any income or if you generate only a little income relative to your deductions over a period of time you'll likely lose so then you'll get to pay not only the back taxes but also interest and penalties.
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) however there is no absolute requirement that you make a profit OR ELSE you're punished and the IRS can demand back taxes. And remember, the three year test is simply a rule of thumb. It is not determinative.
ANd, making a profit isn't so hard because the biggest expenses are in the acquisition of gear, and after that your photography expenses fall drastically (after all, you only need to buy a 'dorff once. After that, your expenses consist of just film, developer, other consumables) But worst comes to worst, even if you do not actually manage to produce a profit though you really tried, then your business is just simply judged failure (as are millions of other small businesses) but you're not required to repay the IRS anything.
Even if you can show that you're engaged in a real business and even if you can show that all of your purchases were used 100% in that business you're wrong in saying that Uncle Sam will be paying for your new Deardorff (or anything else you buy). At the most Uncle Sam will pay the taxes you save by your deductions.
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.
Brian Ellis
9-Aug-2006, 09:37
"You must show a profit once in five years."
Actually that's not quite right, there's no fixed rules concerning the period over which you must earn a profit. As long as you're operating what's clearly a business you can lose money at it forever and deduct the losses (assuming you have other income of a type against which the losses can be offset, which gets into a whole new area way beyond the scope of this thread). For example, if you're an electrical contractor just to pick a simple example, and lose money every year you can still deduct the losses even though you never earn a profit because few people work as electricians for fun. The problem comes in with things like photography, horse racing, breeding, art, things like that, i.e. activities that many people, especially wealthy people, engage in because it's fun but try to claim they're in it for the money so that they can deduct the losses.
The only rules relating to fixed times and profits is the rule that if you make money for three out of five years then you are presumed to be running a business (2 out of 7 years for horse racing and a few other activities engaged in by wealthy people who had real good lobbyists at the time Congress was enacting these rules). Failing to make money in three out of five years doesn't mean you automatically are classified as a hobby rather than a business, it just means the burden will be on you to show that you're actually engaged in photography or whatever as a business.
This whole area is complicated and not susceptible of being throughly and accurately discussed here. For Cyrus or anyone else who contemplates treating their photography as a "side line" business, I'd strongly urge you to sit down with a tax lawyer or a CPA who specializes in taxes, outline your plan, and let them advise you as to whether what you're doing is likely to stand up from a tax standpoint and what you'll have to do to make it stand up. Among many other things, even if your losses are generally deductible, there are certain types of income against which those losses can't be deducted so you'll want to make sure you have the right kind of other income against which to deduct the losses or else the whole thing will be a waste of time.
"You must show a profit once in five years."
Actually that's not quite right, there's no fixed rules concerning the period over which you must earn a profit. As long as you're operating what's clearly a business you can lose money at it forever and deduct the losses (assuming you have other income of a type against which the losses can be offset, which gets into a whole new area way beyond the scope of this thread). For example, if you're an electrical contractor just to pick a simple example, and lose money every year you can still deduct the losses even though you never earn a profit because few people work as electricians for fun. The problem comes in with things like photography, horse racing, breeding, art, things like that, i.e. activities that many people, especially wealthy people, engage in because it's fun but try to claim they're in it for the money so that they can deduct the losses.
The only rules relating to fixed times and profits is the rule that if you make money for three out of five years then you are presumed to be running a business (2 out of 7 years for horse racing and a few other activities engaged in by wealthy people who had real good lobbyists at the time Congress was enacting these rules). Failing to make money in three out of five years doesn't mean you automatically are classified as a hobby rather than a business, it just means the burden will be on you to show that you're actually engaged in photography or whatever as a business.
This whole area is complicated and not susceptible of being throughly and accurately discussed here. For Cyrus or anyone else who contemplates treating their photography as a "side line" business, I'd strongly urge you to sit down with a tax lawyer or a CPA who specializes in taxes, outline your plan, and let them advise you as to whether what you're doing is likely to stand up from a tax standpoint and what you'll have to do to make it stand up. Among many other things, even if your losses are generally deductible, there are certain types of income against which those losses can't be deducted so you'll want to make sure you have the right kind of other income against which to deduct the losses or else the whole thing will be a waste of time.
Thank you Brian for clarifying this. I leave all the legal expertise to my CPA who has consistently advised me correctly over the past twenty years. This has allowed me to prosper in my business and sleep well at night. :)
If you are not operating as a true business IRS can easily determine that. First they will want to see your business occupational license and sales tax certificate. Do you file your local/state tax forms monthly or quarterly? You will need to show bank records for a business account, not a personal one. Legally you should not mix personal funds and business funds together, thus the separate accounts. Are you incorporated or operating as a d/b/a? If operating as a d/b/a there are papers to be registered with the state that shows that (even operating under your real name must be registered) and of course if your are incorporated that is a completely different set of papers and tax forms.
Again none of this should scare anyone off, though seeing a CPA never hurts, so lets not be so negative!
Remember, the tax laws on this field are designed and intended to HELP you start and run your own business. You're not scamming the system by turning a hobby into a side business, and so you've nothing to fear from the IRS. No tax law says that a business can't be something you enjoy doing. No one is suggesting that you NOT run a "true business" either - What I'm saying is only that you most certainly CAN turn your photography hobby into a true business, and enjoy the tax benefits that come with that. Its not so hard nor scary, nor is it illegal nor immoral nor scamming the IRS nor a cause to stay up at night. These are your RIGHTS, people! Congress is bending over backwards to HELP YOU (for once) to do this. They've made it EASY to do.
Having the right paper work is certainly good evidence of being a real business rather than a hobby, but the paperwork not an absolute requirement nor is it determinative on the issue of whether youre operating a business or a hobby. You don't have to be incorporated, you can operate as a DBA, and in my state registering as a DBA is hardly a burden - you fill out a simple online form with the Secretary of State and pay $50. In my case, I've also trademarked my business name, which is again good evidence of being a "business" rather than a hobby (cost: $350 - again, just required filing an online form) but is not required nor is it determinative. Operating as an LLC is also something to consider - but again, to be a business doesn't require you to incorporate. All you have to have is the intent to produce a profit.
Proving that you're in a business rather than a hobby is not a tough obstacle to overcome; the standard of evidence is low, and the presumptions are in your favor. All you have to have is the intent to produce a profit. You don't even need to produce a profit.
Also, separate business accounts is a good idea, but not required to prove that youre running a business rather than a hobby. If you're running as a DBA, you don't have to have a separate business account as long as you have maintained records of business-related expenses/income (Corporations should have separate accounts) and all this requires is a notebook and a file to keep the receipts. If you can balance your checkbook, you can do this.
Eventually, you will have to produce a business income (note I said INCOME, not profit) - but again, that's not hard. Note that you don't have try to produce the income JUST BY SELLING PHOTOS. You're perfectly free to go into a business other than PHOTOGRAPHY per se, but which only requires photographs as an ordinary and usual expense.
Cyrus it sounds like you have it all figured out! Go for it!
Cyrus it sounds like you have it all figured out! Go for it!
Read all about it yourself:
http://articles.moneycentral.msn.com/Taxes/TaxShelters/TheUltimateTaxShelterYourOwnBusiness.aspx
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?
Brian Ellis
9-Aug-2006, 11:21
"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.
"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?
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!)
BrianShaw
9-Aug-2006, 12:07
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.
Jim Chinn
9-Aug-2006, 12:15
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.
Niko Photo
9-Aug-2006, 12:42
"Based on your experience, what else would be needed?"
Me thinks it might be... surviving your first IRS audit. ;)
scott_6029
9-Aug-2006, 12:45
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.
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.
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.
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
10-Aug-2006, 05:33
So who is the person making a "KILLING" on the web and what are they doing special?
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.
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
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_weeks_article/003143_12142005.html
Anyway, see your lawyer/accountant & read something like this:
http://www.writersweekly.com/this_weeks_article/003143_12142005.html
Sorry, I meant something like this:
http://www.nysscpa.org/cpajournal/old/14345325.htm
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
10-Aug-2006, 23:11
"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.
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.
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".
Good point!
Well, I suppose if I actually do make a profit from running a hypothetical side business ...
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".
You've fizzled out!
Seriously folks, running a real business, not a hypothetical one, does include a lot more work than the articles that have been linked in this thread expose. Possible IRS audits, time involvement, capital costs and a continuum of tax forms (local, state, and federal) are real requirements that must be met and *maintained* even if the business is only part time. One of my business professors once said the idea of a "free lunch" does not exist and I think he lectured it correctly. Anyone that runs a business knows it takes time, planning, capital investments and a dedication that can be found through the paper trail the day-to-day business duties leave behind.
I personally do not fear another IRS audit because my papers, purchases, tax records, etc. are in order since we pay in the thousands of dollars annually for the professional services of a CPA. I just hate the hassles involved with having to take time off from my business and the possibility of having to go to court (more time and money spent not in the way I would like to use it) to argue before a judge (if an office audit doesn't solve it), that the IRS investigator sees it differently from my CPA.
Why play in the gray areas for deductions when you can play fairly in the stock market? Heck if I am going to gamble, I might as well do it legally. Anybody know any good stories about day trading? :)
You've fizzled out!
Seriously folks, running a real business, not a hypothetical one, does include a lot more work than the articles that have been linked in this thread expose. Possible IRS audits, time involvement, capital costs and a continuum of tax forms (local, state, and federal) are real requirements that must be met and *maintained*...Why play in the gray areas for deductions when you can play fairly in the stock market? Heck if I am going to gamble, I might as well do it legally.
I don't think anyone is suggesting not maintaining records, or doing anything illegal. These aren't "grey areas" - do you have any idea how many small businesses are being run out of bedrooms and garages?
I don't think anyone is suggesting not maintaining records, or doing anything illegal. These aren't "grey areas" - do you have any idea how many small businesses are being run out of bedrooms and garages?
Like I said, >>> go for it. :)
Curt Palm
11-Aug-2006, 10:32
I'm really surprised at the number of people who don't realize how easy it is to go into a side business and deduct most of their Ebay purchases as business expenses. That's money that would have otherwise gone to Uncle Sam anyway, so it might as well go for a new lens, enlarger, business website etc.
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?
I got the impression from the orignal post that cyrus was propossing the primary motivating factor for starting a side business could be the tax advantage it could provide. Perhaps I was misreading is post. If one was in the business only for the tax savings, I think the time and cost of running a business would outweigh the tax advantage.
If one was in the business only for the tax savings, I think the time and cost of running a business would outweigh the tax advantage.
Carl, you've obviously read through this thread.
Not trying for a personal attack here, but I sensed a convoluted outlook on tax deductions from the get-go. All legitimate businesses involve time and cost and you are right with your analysis of the time/costs versus the tax savings. I posted replies in hopes anyone reading it as a quick way to get "Uncle Sam to pay for their Deardoff" would come to the conclusion you have or surmise it is not worth the effort if you understood the percentage of deduction for the cost of a camera in general is rather small.
AFAIK, cameras are not a one year depreciable deduction, but Brian Ellis would know more about that. If they are not, it means a determined amount of depreciation would be tax deductible over a three or five year period and that allowable amount would be deducted from your 1040 taxable income through schedule C. For example: if a new Ebony was $3,500 and it was depreciated over five years, the deduction would not be $3,500 off of your taxable income the first year of business, but much less. Year two would take a little more off your taxable income, year three would include a smaller portion, etc. I am not an accountant, just a business owner that has been in operation for over twenty tax years and had to look over what the accountant has prepared.
If you are dedicated to start a business and seriously have the time and money to develop the business, well go for it. Cameras, film, scanners, computers, etc. can all be legitimate business expenses if you can show they are needed in the operation of the business. Just be prepared to answer questions on the percentage amount you use them for business vs personal usage and similar. If you do use the same cameras for personal usage, you can only claim the percentage amount for the business towards a business expense. For example, I use my automobile 50% for business and 50% for personal usage and there are other tax forms that must be filled out for this.
It can be a project to keep it all straight if you are actually doing business, thus accountants and tax attorneys. Did I express how much I appreciate my CPA? In a business that has grown, the paperwork has grown exponentially, and my accountant is well worth his fees.
I got the impression from the orignal post that cyrus was propossing the primary motivating factor for starting a side business could be the tax advantage it could provide. Perhaps I was misreading is post. If one was in the business only for the tax savings, I think the time and cost of running a business would outweigh the tax advantage.
Actually this started out by me asking for input from others who are running a side business already for suggestions on over-looked deductions. There are definite tax advantages for running a side business, which presents opportunities for deductions that should not be missed (money you're entitled to have). If you're already doing something photography related (and so something you enjoy) then turning it into a side business is therefore well-worth considering.
I also don't think that running a side business is really all that cumbersome (esp. if you enjoy it) nor are the administration issues so time consuming as claimed. Filing a DBA is a short form and a few bucks. Takes 10 minutes. Schedule C is hardly a major test, and really lets not exxagerate the time it takes to fill out tax forms once a year. Keeping receipts requires a file box. And recording income/loss is not any more complicated than balancing a checkbook once a week. Really, with the internet and all, I don't get why people are so willing to make it sound so intimidating and complicated?
AFAIK, cameras are not a one year depreciable deduction, but Brian Ellis would know more about that.
Section 179 which generally says expenses up to $100,000 for tangible proprety acquired for business purposes are deductible and don't have to be depreciated. Ebony cameras are tangible property. THere's nothing in the tax code that says section 179 doesn't apply to cameras. Read more:
http://www.irs.gov/publications/p946/ch02.html
http://www.bankrate.com/brm/itax/Edit/tips/Stories/sec179_deduction.asp
At the end of the day is all this financially worth the effort? Well, if you're in the particular tax bracket, you'll get a certain % back on your deducted expenses. That's not exactly chicken feed especially if you're starting a business. If you're looking for a quick buck, that's another issue.
Curt please accept my apology for mis-reading your name. Not an excuse, but I recently had eye surgery and I am having problems reading and writing with the new bifocals.
BrianShaw
12-Aug-2006, 15:15
...and really lets not exxagerate the time it takes to fill out tax forms once a year....
Not ot embellish or diminish your viewpoint in any way, Cyrus, but in my state we had to do our state taxes every quarter because of our small revenue stream. It was a PITA because we had to compute and report taxes based on the county in which the sale was made (we had a mailorder business). Even with about 100 sales per quarter, it was a PITA!
Not ot embellish or diminish your viewpoint in any way, Cyrus, but in my state we had to do our state taxes every quarter because of our small revenue stream. It was a PITA because we had to compute and report taxes based on the county in which the sale was made (we had a mailorder business). Even with about 100 sales per quarter, it was a PITA!
Yeah, that would be a PITA. What really would be a PITA is keeping track of sales tax. I'm looking into how that works in the context of Web-based businesses that primarily earn their income from commissions rather than sales (I don't believe making online product sales is really worth the hassle of packing, mailing, collection, etc.)
Joseph O'Neil
14-Aug-2006, 05:47
I also don't think that running a side business is really all that cumbersome (esp. if you enjoy it) nor are the administration issues so time consuming as claimed. Filing a DBA is a short form and a few bucks. Takes 10 minutes. Schedule C is hardly a major test, and really lets not exxagerate the time it takes to fill out tax forms once a year. Keeping receipts requires a file box. And recording income/loss is not any more complicated than balancing a checkbook once a week. Really, with the internet and all, I don't get why people are so willing to make it sound so intimidating and complicated?
-snip-
Hi;
First off , I mean absolutely no offence what so ever, no insult, but book keeping is only "simple" to those people who have never been through any kind of audit before.
First rule of any kind of audit or government inspection is "where's the paper". Records on computer mean nothing in an audit - you will be expected to produce the paper, and ASAP too.
After that, well, you never look at book keeping agian quite the same way. :)
As somebody who operates and does the bookwork fro two incorporated companies - both small, both in Canada, a couple of observations that hold true for *any* country on this planet.
1) It is sometimes wise to hold back on some deductions, but keep the full records. Any auduitor, anywhere, in any juristiction, can always find something. Tax laws are setup that way. The Canada Income Tax act is physically longer than the Bible (small print too ) and no one person inthe country knows every aspect of it, so an auditor cna always develop a "new interpretation". same goes for the IRS, or any other country (I keep in contact with other business people in other countries).
So, when the auditor "finds" something you missed, you go - oh, no problem, and by the way, I fogot to take this decution here - while you are re-evaluating my deductions, woudl you add in this oen I forgt?" It's an old trick an old tax account taught me years ago,a nd yes, once in a blue moon, it saves your bacon.
2) any company setup to make money by use of deductions is just asking for trouble. The government does not like to hand out money, even when youa re in the right. Took me 3 months to get $300 I overpaid the government this past year. Grrr....
3) Loook carefully at what deductions governments pay attention to,a nd what they do not. example, in addition to company work, I used to be treasurer for a small government funded health clinic for about 6 years. If we needed a new peice of medical equipemnt - baby scales for example (drug dealers love to steal them as they are used for weighing out the drugs they sell), well, it could take some weeks or even months to get funding for a replacement. But when it came to computers or software, there never seemed to be any issue at all. Never a question why we needed more ram, bigger ahrd drives, etc, but explain why you need a new examination table, that would take time.
So the point I am trying to make to all of you, say you do have a side business, you might have to justify to an auditor some day why you need that new Super Angulon, but that same auditor may never question why you need a new laptop. Certianly not fair, but that's sometime how the system works. Learn it and work with it.
That's all for now - just be carefull.
joe
I am not in business and don't want to start a new thread but do have a question.
Do the deductions for equipment acquisition apply only to purchases made while in business and not before? I have a lot of existing equipment for my, ah err umm, hobby. Could its worth be an allowable start up expense in business?
Regards,
Herbert
Do the deductions for equipment acquisition apply only to purchases made while in business and not before? I have a lot of existing equipment for my, ah err umm, hobby. Could its worth be an allowable start up expense in business?
Regards,
Herbert
I think the short answer is if you want to start a new business that will include equipment that you personally own, sell the equipment to the business (capital investment) and start from there.
BrianShaw
14-Aug-2006, 18:24
I think the short answer is if you want to start a new business that will include equipment that you personally own, sell the equipment to the business (capital investment) and start from there.
Wow, that would take some real soul-searching to determine market value. Isn't market value defined by IRS as the price a person who didn't need to buy would pay a person who didn't need to sell. It could lead to schitzophrenic behavior... part of you trying to set a high price, while the other part of you is trying to get a bargain. :D
Wow, that would take some real soul-searching to determine market value. Isn't market value defined by IRS as the price a person who didn't need to buy would pay a person who didn't need to sell. It could lead to schitzophrenic behavior... part of you trying to set a high price, while the other part of you is trying to get a bargain. :D
You mean like someone selling their Deardorff for $1.00 to their company and then claim it as a $2,000 + deduction? Now who would do that? :p
Joseph O'Neil
15-Aug-2006, 05:33
Do the deductions for equipment acquisition apply only to purchases made while in business and not before? I have a lot of existing equipment for my, ah err umm, hobby. Could its worth be an allowable start up expense in business?
Regards,
Herbert
Can be, if you do it right, and are reasonable about it. There are several different ways to do it. the main theme however, is "fair market value". For example, I have an incorporated company, which under law, is a seperate legal entity. Therefore, I was able to sell my company some of my personal camera gear.
However, to justify my prices at the time, I went on Ebay, looked up completed auctions, printed out some of those pages, and i also looked up some used camera prices advertisements in magazines, on the net, etc,a nd saved those prices on paper. Therefore, if any auditor ever comes back 3 or 4 years after the fact (they never did) and questions my rationale in using those prices, I pull out those papers and prive that my prices were representative of fair market value at the time.
another issue, which may or may not arrise, depending on your specific circumstances, is I have mroe than one functional 4x5. For example, my company owns the monorail I have, but my Tachihara is owned personally. Same thing for some of my lenses. The reason i did this is my company is a side business, not full time.
You see, if you are a full time photogrpaher - got an ad int he yellow pages - the whole 9 yards, any and all gear and supplies you buy - full deduction as expenses in one form or another.
But even with an incorporated company, when it is a side business, you have to be carefull. It's always possible for the government to make a ruling that your business is a hobby.
So in my specific case, to get around that, I have very clearly marked on my books, these lenses and this camera are company property, and this camera and these lenses are personal use. There is nothing to stop me from using personal lenses for business use if the opportunity arrises, but I have it clearly marked.
Also for insurance purposes, anything you use - camera, wood saw, power washer - anything you use for business use is very often NOT covered under standard home owners insurance. Your milage may vary, so look into it to be sure. So by having specific parts of your gear and or equipment marked personal and business use, in my case, it saves on insurance.
One last caveat is that while basic tax laws are similar in almost all countries based on the heritage of English Common Law, the reality is the "devil in the details". You cross a state or provicincail line, and pow, everything can change on you in a heartbeat, so make a point of either getting professional advice or researching what you want to do very, very carefully. Bottom line is, it's not always whatyou want to do, but the actual method of how you do it that either saves your bacan or drops you into the fire.
good luck
joe
steve_782
15-Aug-2006, 05:44
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?
You may want to look into the entire tax situation, not just the federal income tax implications. Where I live, you have to file a schedule with the county for all business equipment deductions. This puts you on the county tax rolls and you have to pay taxes on your business equipment as long as you show it as a business asset.
You can have a 10 year old computer, and until you show it as sold - you're still paying taxes on it. For photo equipment, this makes no sense, so I no longer deduct photographic equipment from my income tax. This just sets me up to pay taxes to the county for as long as I own the equipment.
Ralph Barker
15-Aug-2006, 07:38
. . . Where I live, you have to file a schedule with the county for all business equipment deductions. This puts you on the county tax rolls and you have to pay taxes on your business equipment as long as you show it as a business asset.
. . . until you show it as sold - you're still paying taxes on it. . . .
That was also the case in Santa Clara County in California, where I previously lived. Get a business license from the City, and then the County wants a piece of the action. Although the tax rate was fairly nominal, filling out yet another set of tax filings was an additional hassle, and different rules applied.
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