We’re seeing businesses across the nation acknowledge this week’s 9/11 day of remembrance in really special ways. It’s been 22 years already.
Looking back, 2001 and 2020 are similar as stand-out turning points for America, albeit in different ways and for different reasons. As it relates to business, 2020 marked a new era of how Americans think about work.
The Great Resignation, as it was conveniently coined by the word-spinners, spawned more than just droves of workers leaving their day jobs. They left and began starting their own businesses.
In 2020, there was a 24 percent jump in new business formations, and 2021 boasted a 5 percent increase from 2020. And over 3 million business applications have already been submitted through July of this year (compared to 4.4M for all of 2019). The entrepreneurial vibe is still trending upward.
If you’re reading this as a new-ish business owner or as one of those starting over from the beginning, let’s talk taxes. Specifically, you need to know when you can start counting your business expenses as tax deductions.
TCG Accounting on What “Open For Business” Means To The IRS
“If you are not embarrassed by the first version of your product, you’ve launched too late.” ― Reid Hoffman
It might go without saying, but because I’m an accounting professional, it’s important for me to be clear at the outset of this discussion: you have to have launched your business to deduct business expenses. This means you’re actively engaged in activities with the intention of making a profit.
If you’re making hand drawn stationery as a creative outlet, “open for business” means you’ve got an Etsy seller page, active product listings, and orders coming in.
If you’re exploring consulting as an alternative way to bring home an income without the responsibilities of managing a facility and a staff, “open for business” means you have a registered business entity, an online appointment portal, and an invoicing system that’s receiving payments.
If you want to capitalize on your industry experience by teaching others, “open for business” means you’ve got a YouTube channel, a marketing plan that’s helping you grow, and an active ad account.
These are all just examples, but all of these situations send the right signals of your business status to the IRS.
Now, you don’t have to be a full-blown corporation or brick-and-mortar business from day one, but you do have to officially be “open for business.” (Here’s a checklist to consult to see if you’ve covered the start-up basics.)
Because the IRS generally considers an activity a business if it’s conducted with a genuine profit motive and carried out in a businesslike manner.
That’s harder to determine in today’s gig economy.
So here are some of the things the IRS is looking at to differentiate your venture from a hobby so that you can deduct those business expenses with confidence:
- You can prove the time and effort you’re putting into the activity.
- You intend to make a profit in the short or long term.
- You can demonstrate expertise and success. Sometimes the IRS will look at whether you have a track record of generating profits in similar activities.
- Even if you’re not currently making a profit, there is a possibility that the activity might generate profit in the future.
A note on that last point: if you’ve been at this for awhile, but your business activity consistently generates losses year after year, the IRS may question whether you’re truly in business to make a profit. To avoid this, aim to show a profit in at least three out of the last five years, or be able to demonstrate sufficient growth toward that end.
If you can meet these requirements, not only are you “in business” for yourself, but the IRS will think so too. That means you can legally deduct those mounting start-up business expenses on your tax return.
But, of course, in order to do so, you need to be keeping accurate records of your business expenses and profits (another key indicator the IRS will be watching for). Proper recordkeeping not only helps you manage your finances effectively but also demonstrates to the IRS that you’re serious about your business.
Need help with that? Let’s talk about your current systems and how we can take care of this vital piece of business ownership for you:
218-623-6050
For when you’re starting for the first time or starting all over again,
The TCG Accounting Team
