Saturday, January 10, 2009
Hobby or Business? If it's fun, be careful.
Well, here I am making another exception and taking on a unique situation. But since 2009 is to be the year of change, why not? And, I do think that there is enough in Guren's situation that many of you will get something from my answers. My response is in orange.
My wife and I are avid travelers and, although we have settled down and each work full-time as employees at different companies, we plan to start a travel blog with the goal of making enough money to fund even more traveling.
We will file a dba and work as a partnership. A partnership is the least tax advantageous structure for a husband and wife business. For some basics on that, read these posts payroll -- spouse as employee .
1 - it seems too good to be true that we could deduct the cost of our travel and other expenses against our blogging profit and, if there are losses (and I'm sure there will be in the first few years), deduct those losses from our regular employee incomes. If the losses are great enough, it would be like the IRS paying us to travel. Or am I dreaming? Your dream may become a nightmare unless you show a true profit motive. Your goal cannot simply be to save enough in taxes to pay for your travel. That very much has the ring of a home-made tax shelter to me and I'm sure would make the same sound to the IRS.
Your profession -- travel blogger -- falls into the same genre as skiing and photography and other activities that people do for fun and so the proof that you are in it to make a profit must be stronger than for other professions such as massage therapy or IT consultant.
The IRS lists nine guidelines that will help determine whether you’re goal is to make a profit. No single item on the list settles or resolves the issue, and the list includes questions such as:
Do you carry on your work in a businesslike manner? Do you keep accurate records of income and expenses? Have you had success in carrying on similar or dissimilar activities? Have you taken a similar activity and converted it from an unprofitable to a profitable enterprise? Have you had general success in running other kinds of businesses? Did you write a business plan on how your blogging is going to make money over the next 5 or 10 years?
2 - As long as we have losses, are we forbidden from contributing to a SEP retirement plan? For a SEP, and any other pension for self-employeds, the contribution is determined by net income. That means what you are left with after deducting business expenses. A loss means no pension contribution for the sole proprietor. If your spouse is your employee, then a loss does not have that same relationship to the spouse's pension contribution.
3 - any idea of what a indie-friendly CPA should charge for an initial consultation? Between $150 and $350 per hour. Depends on the geographic location and expertise of the tax pro.
I hope you're able to help!
Thanks in advance!
St Louis, MO
A related comment: There are so many books and sites that tout self-employment as a way to pay no tax. This is a concern of mine. I'll say more about it in this month's eLetter Ways Through the Maze. If you are not already on the mailing list and would like to subscribe, you may do so here.