subject: Home-based Mlms- A Hobby Or A Business [print this page] A storm of home based MLM businesses are strikingly observed in the market, as a result of downsizing, layoffs and even the need for additional income. These businesses are assured sizeable tax deductions as well. But now with the Internal Revenue Service laying specific rules on tax deductions of such businesses, it is time to clear up if the business is a hobby or a legitimate business. Playing the Roulette in Audits is a dangerous game.
Owing to the fresh specifications in rules, the IRS is on a mission, taking a closer look into the business to ensure if the maneuver is actually a business or a hobby. A business operation allows taking up of losses associated with it in the tax deductions. On the other hand, hobbies do not permit carrying of such losses in deductions on tax returns!
Solving an issue as such is simple. The best way to justify the operation as a business in reality is to have a net income. But again, having net income always could be difficult. So, in cases as such, the business intent as well as the time and effort invested for the business should be documented in every detail possible. This leaves nil loopholes for the IRS to disapprove your deductions claiming it to be a hobby and not a real business.
With due time in the industry, entrepreneurs have learnt the lesson to file accurate records of the expenditure, consult with a qualified tax consultant and then file your returns with his expert advice. It is indeed always better to be informed and prepared than be sorry, especially when the tax man comes knocking at the door.
Having been enlightened with this, a perplexing query may arise. What are the odds of me being audited?
Some researches and statistics have revealed that small or home based MLMs are about three times more likely to be audited as compared to the traditional MLM owners. But in actuality, chances of being audited are just 1%. A greater risk of being audited could be minimized by preparing and filing your return in ink as compared to a machine generated return.
What the IRS actually looks for is a safe DIF score. The Discriminate Function (DIF) score is a method which compares your returns income and deductions against the national aggregates. And it is based on this score that the returns are audited.
The generation of the DIF score takes into account your income, the size of the family, the residential area and basically the source of income. For instance, if the total income is just $45,000 but with that you reside in an exquisite area with say three children, the possibility of your return being audited is quite high.
So basically, the IRS inspects for under-reported incomes or over-reported deductions. Hence, it is wise to slow and down and play it secured and equipped.
To recapitulate, running a home based MLM business could shower tax benefits that many businesses would stand a chance to claim. But for that, it is advisable to be aware of them and stay within the boundaries of the IRS guidelines. Alongside, make sure the operation is qualified as a real business in order to relish the legal deductions made available to you.
by: Gagan Bakshi
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