Clarence - 10:08 pm on Dec 10, 2012 (gmt 0)
My experience: IRS Employee from 2007 to 2009. I create my first site while I was an IRS employee, and built most of my site while on the clock. The IRS has a code freeze starting Jan 1st to April 16th where no major systems can be touched; giving us employee’s a ton of free time LOL.
One of the hardest cases for the IRS to prove is Business vs. Hobby. This isn't usually proven after 1 year of losses but 3 years of consecutive losses"
If your intent is to make money, you are running a business, whether you're profitable or not is another question, and after running for a few years at a lose that could bring scrutiny from the IRS. To prove a hobby, you have to be seen as actually not trying to make money.
But 9-10 business suffers loses in their first year of operation and it's pretty normal.
The IRS is pretty familiar with Online business model, and the common expenses associated with them
Common Website Business Expenses:
•Domain Name Registration
•Web Hosting/ Server
•Marketing Cost (Online/Offline)
•Common Services: (Support/Email/Misc)
•Labor (Web Design, Administrative, etc)
Nothing along these lines would smell fishy to the IRS for a website business.
And loses in the first year wouldn't raise red flags with the IRS either. And by losses I mean $2,500 in expenses and not making a single penny.
But I have noticed different business owner treat taxes differently (Online and Brick and Mortar). And it's a matter of personality on how far you go in tax reduction.
Me, I'm pretty extreme and will take all deduction, and even donate to charity to reduce my rate even further. I even get a list of item you can earn Tax credits for buying to find ways to reduce my taxes even further.
I don't believe in paying a single penny more in taxes then I'm legally obligated to pay. And If the IRS wants to waste time debating a few $1,000 in expense that I will prove in my favor, then let them waste their time.
One very successful business person told me: If you need it to run your business, write it off and let the IRS prove you don't need it, worse case scenario you have to pay the taxes any way.