Business Benefits vs Personal Losses

8 replies
I have been interested in starting a business instead of spending my own personal money. It would seem that you could write off PPC and advertising costs in a business where as any money spent as a personal matter is just money spent. I don't like the idea of spending money on a website, PPC, outsourcing, etc and not getting any credit for it then being taxed on what I make in return. Therefore, I would imagine creating a business entity would be good for tax purposes as well.

I was wondering if anyone had any pointers, articles, links, or products that go into creating a legal business for IM and how you can use the business for costs, income, etc, specifically of the US.

Thank you.
#benefits #business #hobby #losses #personal
  • Profile picture of the author mr2monster
    If you're making money on something regularly (and it's over $600 per year), the IRS says it's a business... So, if you're spending money on something in order to make money from it... it's a business expense.

    Just because you're a sole proprietor (meaning not an official corporation or llc, etc) doesn't mean that you're not running a business.

    And when it all comes down to it at the end of the year, if you've made money... the IRS will want a chunk of it.

    That being said, you can write off a lot of your expenses even if you're just a sole proprietor.

    As always, you should talk to a qualified professional... like your tax guy/CPA to get specifics.
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    • Profile picture of the author RMC
      ...which tax filing process do you want to be more complicated.

      Your personal taxes, or your business?

      I'm no lawyer so don't come chasing me down later with claims of detrimental reliance. There are tons of legal aspects impacted beyond just expenses. So this is just like my opinion man...and does not in anyway constitute as official tax or legal advice

      The biggest benefit of a business, is that you can get more seperation and asset protection in the event of a lawsuit or business failure. This is all relative to the type of business you choose and there are several.

      BUT you get a lot more paperwork to do, reciepts to keep, and rules to keep up on so that it operates functionally as a separate entity. The fun part I guess... you'll get official paychecks for yourself, or else just not take a salary and put it all into the biz account and withdraw/issue a k-1 of your % earnings at fiscal year end (assuming you have other income to live on in the meantime) and have a tidy form for personal taxes.

      It's been a few since my business law class, but I believe that even with an LLC, an owner that gets too cozy and informal with the assets can be pursued by creditors in the event of a loss or failure so you have to be pretty good with keeping the expenses and revenues straight and definitely keep a separate bank account.

      You also have a few options on taxation even with just an LLC. You can be a single person LLC and all the profits/losses go straight to your personal income taxes. Or you can choose to be taxed as a corporation, s corporation, or partnership.

      The downside, is that all of this comes at a cost. It can cost hundreds of dollars to get your licensing, and paperwork complete, and fees stay up to date on filings. Missed deadlines come with $50+ fees, and overall the gubment will be watching a lot closer to what you're up to if you misfile or have large variances from year to year.

      One upside...a business with a lot of line item deductions is scrutinized less than a personal tax return with a lot of line item deductions.

      In short, you may end up making the same take home after all the extra fees, filing, organization, and accounting cost, etc. despite the extra write-offs.

      But it's certainly got some official appeal to it. I know I take notice of who's running sites online as a no name sole proprietor, and who's actually got a business license. I have a niche site under an LLC, but just recently setup a new one for my older IM sites that were at one point in time just going to my personal taxes(even as sole/personal taxed you can write off some of the major expenses).

      It's going to depend a lot on what you want to do with said business. What you want to happen/or who to get it, if you pass away. Will you get property in the name of the business. Employees, etc.

      Then of course you have affiliate commissions payed out to consider. When your in house affiliates go past $600 in earnings you have to report that. Relatively simple for a business, not so much when you do it through personal tax returns.

      That's just the tip of the iceberg. If you don't have a lot of time to spare, and aren't making a decent wage already it might be more than you have time to handle.

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  • Profile picture of the author Mr. Enthusiastic
    I'm not a tax professional, so you should check with a tax accountant, tax attorney or someone who can give you the advice you need. OK, that's out of the way...

    In the U.S., if you say you're running a business and want the IRS to respect it, you have to show a profit three years out of five. This gives you a chance to lose money for a while starting the business without the IRS complaining that it's just a hobby. Of course if you do IM right you should have a profit the first year, right? If you have a business, then marketing costs are a business expense. Business taxes start with the income of the business, subtract the business expenses, and tax what's left. So you definitely should get the advice to start off right with all the record keeping and tax paperwork you need.

    Google for "sbdc south carolina" and you'll see the local branches of the Small Business Development Centers in your area. They should have a free consulting service where you can take a class that goes over all the basics for you.

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  • Profile picture of the author J Bold
    Even if you're an individual you will be filling out W-9s for affiliate marketing and with those you can claim business expenses so of course you do not have to pay taxes on your gross, just your profit after all businesses expenses. You do not need a business for that.

    However, it can be easier in the long run to have a business so you can have a separate banking account, separate all your business expenses from personal, etc.
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    • Profile picture of the author Loren Woirhaye
      A tax pro, not always a CPA ("costs plenty, avoid") can set you
      up quickly and cheaply. Just filing forms and things doesn't
      mean you cannot claim business deductions if you don't file
      them - but it does establish a date whereby you've claimed
      "I'm in business" - and from there you can track your expenses
      to a ridiculous degree.

      When I was in school my dad would ask for receipts to any
      books I bought, because his opinion was that if it was around
      the house he might read it and that would make him a
      better teacher (he taught literature). he deducted printed
      matter pretty much as education expenses.

      There's a book called "Small Time Operator" you might want
      to get. The reality is that it's sometimes best to operate
      under the radar, so to speak, for awhile - claiming deductions
      but not broadcasting to your community you run a business
      from home - because then you'll fall under local ordinances
      forcing you to pay local fees and duties which are often
      quite ridiculous (and I suspect riddled with bureucratic graft
      and protectionism). These fees can force some small businesses
      out of business before they even get started... mostly that
      happens with EPA and food regulations however.
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  • Profile picture of the author Woody C
    Wow...thank you everyone for all of the great information so far. I was not expecting those in-depth answers. I will continue to work as a personal entity and try to understand a little more about it.
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  • Profile picture of the author rightservers
    Well you can also write off a lot more things than just your advertising expenses. If you have an office in your residence then you can write off some of your expenses (proportional to the amount of space you have allocated to your office) as well as entertainment and travel costs. Got a cell phone you use for business here and there? Then go ahead and write that off too. There's a big up side to it.

    Hopefully it all works out.

    Kind regards,

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    • Profile picture of the author InternetBullDawg
      You've got some really great in depth answers here. As an accountant I can tell you that I love it when I have someone to call to go over such information. So go ahead and start hunting for a tax preparer, enrolled agent, or CPA in your area. I offer free consultations to customers to discuss such issues. It is best to have all this ironed out before it is time to do your tax return.

      As another poster mentioned I think the biggest issue with alot of businesses is the hobby loss rules. You can read more about it a the IRS website:
      Business or Hobby? Answer Has Implications for Deductions

      Find a good accountant that will talk and explain things to you. That is what I try to do. I want to educate my clients.

      I hope this helped you some.


      (I have to put this below with any correspondence)
      IRS Circular 230 Disclosure: Unless expressly stated otherwise in this transmission, any tax advice contained herein, forwarded with or attached to this message was not and is not intended to be used, nor may it be relied upon or used, by any taxpayer for the purpose of (1) the avoidance of any tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions, or (2) promoting, marketing or recommending to another party any tax transaction or tax-related matters that may be addressed herein.
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