Because of the internet and the digital age, starting a side business to help pay the bills has never been easier. This motivates people to start their own business to try and get ahead. However, make sure your motives are as clear and innocent as this. It is not a good idea to create a company or shell of a company only to get a tax deduction. If you truly have wanted to become an entrepreneur, then a side business may be the ticket, besides providing a tax advantage. For details, make sure that you speak with a tax advisor or a Certified Public Accountant.
There are rules about recording losses for a side business. First, the IRS requires you to start the business intending to make a profit. Further defined, you must make a profit for three of five years; this will show the IRS your goal is to turn a profit. There are legitimate businesses that suffer losses for many years. If you feel your business won’t make a profit for years to come, then you should consult a tax advisor going forward.
Second, show the significance of your side business. Examples of this include detailed financial records, a bank account only for your business, and a current business plan. You should also keep records to show your time and effort going towards the business.
Third, you need to show the legal structure of your business. Examples include a sole proprietorship, an LLC, an S Corporation, and/or partnership. You can use any entity and still take a loss on your personal taxes, including incorporating your business.
There are things to keep in mind with whichever structure you choose. You should maintain separate records for your business and personal finances. Lastly, have a solid understanding of how your decision will affect your taxes. If you want to pursue your dream, play by the rules and know your legal obligations.