Small Business Tax

Hobby or Business? Understanding the Difference According to IRS Rules

When you’re passionate about something, it’s easy to lose track of time—and money—pursuing it. But if that passion starts bringing in cash, it’s time to ask yourself: Is this a hobby, or have I inadvertently become a business owner? The IRS takes this distinction seriously, and so should you, especially if you want to stay on the right side of tax laws and avoid any surprises come tax season.

💡 The IRS Wants to Know: Hobby or Business?

The IRS has clear guidelines to help you determine whether your side gig is a hobby or a business. If you’re treating it like a business, they expect you to show it. This includes maintaining accurate records, dedicating time and effort to make it profitable, and relying on the income it generates. On the other hand, if your activity is more about personal enjoyment and not about making money, it might be classified as a hobby.

📌 Here are some key factors the IRS considers:

✅ Businesslike Manner: Are you keeping track of your income and expenses, and do you have a plan to make a profit?
✅ Effort and Time: Are you investing significant time and effort into this activity, indicating that your goal is to make it profitable?
✅ Dependence on Income: Do you rely on the income from this activity to support your lifestyle?
✅ Personal Motives: Are you doing this because you enjoy it, or because you’re aiming to turn a profit?
✅ Other Income Sources: Is this activity funded by income from other sources?
✅ Profit History: Have you made a profit from similar activities in the past, and do you expect to in the future?
✅ Adjustments for Profitability: Are you changing how you operate to try to make more money?
✅ Expertise: Do you have the knowledge to run this activity successfully as a business?
✅ Profit Consistency: Does the activity make a profit in some years? Can you reasonably expect future profits from the assets involved?

No single factor will determine your classification; the IRS looks at the entire picture.

❓ Why This Matters for Your Taxes

If your activity is classified as a business, you can deduct business expenses, which can reduce your taxable income. But if it’s a hobby, the rules are stricter, and deductions are limited. Misclassifying your activity could lead to issues with the IRS, including penalties.

🚩 Setting Yourself Up for Success

Whether you’re just starting out or have been at it for a while, proper planning is key to success. Every business is unique, so your budgeting should be too. Start by clearly defining your long-term goals—where do you see yourself a year or five years from now? Once you have that vision, you can create a budget that aligns with your goals, ensuring you spend money wisely to support your business growth.

Unsure whether your passion is a hobby or a business?

2024 could be the year your passion project takes off. But if it does, be ready for the IRS to take notice. Understanding whether you’re running a business or indulging in a hobby can save you a lot of headaches—and potentially a lot of money—down the line.

If you’re unsure whether your passion is a hobby or a business, or if you need help getting your finances in order, let’s chat. Our team of tax experts is here to help you navigate the IRS’s rules and set you up for success in 2024 and beyond. Don’t leave your tax situation to chance—reach out today and turn your passion into a profitable venture with confidence.

Combining a Vacation with a Foreign Business Trip? 2024 Guide in Maximizing Your Tax Deductions

When a self-employed individual embarks on a business trip outside the U.S., and the journey is entirely for business, all ordinary and necessary business travel expenses are deductible—just as if the trip were within the U.S. However, if the trip also includes a vacation, special rules dictate which travel expenses to and from the destination are deductible, when other business travel expenses like lodging, meals, local travel, and incidentals can be deducted, and when they must be allocated.

Note: The Tax Cuts and Jobs Act of 2017 temporarily suspended the deduction of miscellaneous itemized expenses, including employee business expenses like travel, through 2025. So, this guidance applies solely to self-employed individuals during the 2018-2025 period.

2024 Travel Tax Pointers 📌

Whether you’re visiting nearby countries or exploring more distant destinations in Europe or beyond, here are some essential travel tax pointers:

Primarily Vacation
If the trip is mostly for vacation with only a few hours spent on business activities like attending seminars or meeting foreign colleagues, the expenses for travel to and from the destination are not deductible. Other travel expenses need to be allocated on a day-by-day basis, with only the business portion being deductible.

Primarily Business
If the trip is primarily for business and meets one of the following conditions, the travel expenses to and from the destination are fully deductible (as they are for domestic travel):

✅ The travel outside the U.S. is for a week or less (seven consecutive days, excluding the departure day but including the day of return).
✅ Less than 25% of the total time outside the U.S. is spent on non-business activities. If 25% or more of the time is spent on non-business activities, a day-by-day allocation of all travel expenses between personal and business activities is necessary, with only the business portion being deductible.
✅ The individual can prove that a personal vacation was not a significant factor in planning the trip.
✅ The taxpayer did not have substantial control over arranging the trip. (This is unlikely to apply to self-employed individuals, who usually have substantial control over trip arrangements.)

When deciding what counts as business and non-business time, business days include days en route to or from the business destination by a reasonably direct route, days when actual business is conducted, weekends or standby days between business days, and days when business was scheduled but canceled due to unforeseen circumstances.

Non-business days include days spent on non-business activities, as well as weekends, holidays, and other standby days at the end of business activities if the taxpayer stays for personal reasons.

💡 Foreign Conventions, Seminars, or Meetings

For tax purposes, travel expenses to attend a convention, seminar, or similar meeting outside the North American area are not deductible unless:

1️⃣ The meeting is directly related to the taxpayer’s trade or business, and
2️⃣ It’s “as reasonable” to hold the meeting outside North America as it would be within it.

The IRS defines the “North American area” broadly, covering the U.S., Canada, Mexico, Bermuda, several Caribbean nations, U.S. territories like American Samoa, and some Central American countries.

🚢Cruise Ship Conventions

To deduct the cost of attending a business-related convention on a cruise ship, the ship must be U.S.-flagged, and all ports of call must be within U.S. territory. The maximum deduction is limited to $2,000 per attendee, with strict substantiation requirements, including signed statements from both the taxpayer and an officer of the convention sponsor.

💵 Spousal Travel Expenses

Generally, deductions are not allowed for travel expenses incurred by a spouse, dependent, or employee accompanying the taxpayer on a business trip unless:

1️⃣ The spouse is an employee of the taxpayer,
2️⃣ The travel serves a bona fide business purpose, and
3️⃣ The expenses would otherwise qualify as deductible business travel expenses for the spouse.

Because spousal travel expenses are not deductible between 2018 and 2025, the third condition cannot be met. However, lodging costs for an accompanying spouse can still be deductible at the single rate, especially when there’s no difference in room rates for single versus double occupancy. Additionally, if the spouse travels in the same vehicle, no allocation is needed, so the entire business-related transportation cost is deductible.

Tax Deductions for a Foreign Business Trip Can Be Tricky

As you can see, determining the tax deduction for a foreign business trip that includes a vacation can be complex. If you need personalized tax guidance or assistance planning such a trip in 2024, don’t hesitate to reach out to us. We’re here to help make your business travels more tax-efficient.

Call us today for a free consultation, and let’s ensure your next trip is both productive and tax-smart!

10 Steps to Starting Your Business in 2024

Starting a new business is rarely a walk in the park. First-time entrepreneurs often underestimate the journey from a concept to a real-world business. The commitment needed, even before your business officially exists, can be overwhelming. But remember, “anything worth doing is worth doing right.”

There are several crucial steps to take before launching your dream business. Pay close attention as you move forward.

Let's dive into these 10 key steps for starting your new business:

1️⃣ Identify “Why” You Are Starting a Business

Before anything else, determine why you’re compelled to start this particular business now. Is it just because you think you have a great, sure-fire idea that will generate a lot of money? If so, you may want to take a step back… you’ll likely be disappointed. But if it’s because this will allow you to genuinely do something you love, and something that you think will make an impact on the lives of a lot of people, then, by all means, push ahead.

2️⃣ Identify the NEED

Ensure your idea addresses a genuine market need. DO NOT allow yourself to become “a solution in search of a problem.” Make sure that people are asking for a business like yours and that need is currently going unfulfilled.

3️⃣ Don't Quit Your Day Job Just Yet

Building a successful business is not something that happens overnight. This often takes years of planning and hard work, not to mention many mistakes along the way. All of this is to say that if your ability to quit your day job and focus on your new business full-time depends on instant success… don’t quit your day job just yet.

4️⃣ Don't Neglect Your Family

Yes, starting a business is something that requires a huge amount of your time. Yes, you need to devote every ounce of space in your brain and every free moment to this goal. But do not, under any circumstances, let that come at the expense of your loved ones and those around you. You’re going to need quite a bit of support to get your new business up and running. If you neglect your family now, you’re not going to have that support later.

5️⃣ Write a Business Plan

At this point, you can start working on making your vision a reality. This part of the journey always begins in the same basic way: writing a realistic, actionable business plan that will guide your every move in the future. With a business plan, you really do need to be as specific as humanly possible.

You know where you’re starting, and you know where you want to end up. The job of a business plan is to connect those dots by way of a series of smaller, logical, and achievable steps. It’s essentially the roadmap you’ll use to shine a light through the darkness, guaranteeing that you’re always moving in the right direction (and that this direction is forward).

6️⃣ The Entrepreneur’s Bet - How Much You Need to Invest

As you write your business plan, you’ll also have to make what is often referred to as “The Entrepreneur’s Bet.” Essentially, you need to figure out how much money a business like yours needs to make in order to become profitable.

You also need to acknowledge that, once again, your business is very unlikely to be successful enough right away to have this bet pay off in the short term. A lot of new businesses are operating at a loss at first — that’s okay. But this is yet another step that confirms the path you’re on is actually viable and it’s one that you absolutely do not want to skip.

7️⃣ The Myth of the “One Size Fits All” Approach

At this point, it’s also important to acknowledge that there really is no one “right way” to start a business. The choices you have to make will be influenced by a wide range of different factors, many of which are unique to your industry, your business plan, and even the vision that you’re starting with.

Case in point: You need to review all local, state, and federal regulations pertaining to what you’re trying to accomplish. Different places have different laws, and ignorance is not an excuse for breaking them. Factors like how to become compliant, what standards a product has to meet and more will all be influenced by these regulations, and they will impact a lot of the steps on your business plan as well.

8️⃣ It’s Time to Start Thinking About Technology

Once this foundation is all in place, it’s time to start thinking about the tools you’ll need to bring your new business into the world. These days, that involves a lot more technology than people often realize. This is another one of those steps that will obviously be impacted by the type of business you’re starting. A local brick-and-mortar retail store will obviously have different technological needs (point of sale systems, inventory management equipment, etc.) than an online marketing agency (graphic design software, collaboration tools, etc.).

But when built properly, your technology strategy and your business strategy are essentially one and the same. They feed into one another, and your IT helps generate the momentum you need to continue to grow and expand while remaining agile as well. It’s far too important to neglect.

9️⃣ Choosing the Right Business Entity

This is another important step you don’t want to skip because it dictates things like taxes, paperwork, liability, and other legal elements of your business. One of the most common types of business entities is the limited liability structure or LLC. This is because it provides you with the level of flexibility you need right now, coupled with the protection you’ll need from a personal liability standpoint. But that isn’t a guarantee that this is right for you. Other structures like sole proprietorships, partnerships, S corporations, and C corporations all have their fair share of advantages and disadvantages. You need to pick the right one today or you’ll open yourself up to a world of problems tomorrow.

1️⃣0️⃣ Finding the Help You Need (and You WILL Need It)

Finally, as your journey toward true entrepreneurship is about to begin in earnest, you need to understand two of the core pillars of successful business ownership:

✅ You do not know everything, even if you think you do.

✅ You cannot do it all alone, even if you think you can.

The difference between failed and successful business owners often come down to the acknowledgment of these two points.

Rather than do a poor job at a business task for which you don’t have the skills, don’t be afraid to hire someone who does have those skills. Rather than guess at answers to questions, find the right advisors and mentors to guide you. Reach out and find the people who are willing to assist you and don’t be afraid to share your vision with them. You WILL need help and there are people who are absolutely willing to stand by your side. You just have to want to look for them.

Ready to turn your business idea into reality?

Starting a new business is harder than you probably thought, especially when you consider the sheer amount of time you’ll need to devote to the steps outlined above. But provided that you have a realistic vision and a passion that cannot be extinguished, success is no longer a question of “if” but “when.” The stakes are high and the risk is higher, but the rewards are even greater if you persevere. Never let anyone tell you otherwise.

Contact us today, and let’s work through the details together to ensure your new business is set up for success. We’re here to help you every step of the way.

Avoiding Tax Audit Nightmares: The Importance of Keeping a Mileage Log

I’ve got some real talk for you about that car of yours. No, not about the latest car wax or sweet rims—today, we’re diving into the world of taxes. That’s right, taxes. Don’t snooze on me now; this is important!

❓ You know that sweet ride you use to zip around town for business meetings, client visits, or coffee runs?

Uncle Sam wants you to keep track of those miles, or he’ll keep the cash that could’ve been yours. Yep, if you don’t jot down your miles, your tax deduction dreams might just go down the drain.

In court, folks like you and me lose out on car expense deductions because—get this—we don’t have what the tax nerds call a “credible business mileage log.” Basically, if you can’t prove you drove those miles for work, the IRS will laugh all the way to the bank with your money.

Don’t believe me? Ask Ed and Steph Smith. These two lovebirds tried to get crafty during their tax audit. They handed over all sorts of stuff—calendars, gas receipts, and credit card statements. But here’s the kicker: they cooked up their mileage log after the fact, and it had more errors than a cat playing Sudoku.

The court took one look and said, “No dice, Smiths.” They lost out on all their car-related tax deductions and had to settle for the peanuts the IRS was willing to throw at them.

Avoid Ending Up Like the Smiths

So, here’s what you’ve gotta do to not end up like the Smiths:

✅ Keep a mileage log like your life depends on it. Or at least like your wallet does.
✅ Don’t flunk tax basics 101. Know the rules, man.
✅ Keep your financial house in order. Record your earnings and expenses like you’re auditioning for the role of “Responsible Adult.”

Got the idea?💡

Now, if you’re scratching your head thinking, “How the heck do I even start a mileage log?” or you’ve got other tax woes, hit us up. We’re here to help you navigate this tax maze without tripping over your own feet.

Tax season is like a game show, folks. Play it smart, and you might just hit the jackpot. Mess up, and it’s a one-way ticket to the “You Owe Us Money” lounge.

Need help getting started?

Reach out to us today, and let’s make sure your mileage log is airtight and your deductions are solid. Your future self (and your wallet) will thank you!

10 Common Mistakes to Avoid when Starting a New Business: For Small Business Owners in 2024

The process of starting a small business can be an arduous one; there are numerous steps that need to be taken — and often in a precise order — to legally establish a business. As a result, the process can be overwhelming. Unfortunately, it’s also easy to overlook some important details and steps along the way. By being aware of a few of the most common legal and compliance mistakes made by small business owners when starting out, you can be better prepared for future success.

1️⃣ Misclassifying Employees as Independent Contractors

Regulators are coming down hard on misclassifications. The IRS estimates that this problem includes millions of workers. It is best to talk this through with an expert, but you can get some background on the guidelines at the United States Department of Labor website.

2️⃣ Choosing the Wrong Business Structure

One of the first major decisions you’ll need to make is the type of business structure you will select. This can range from a basic sole proprietorship (which doesn’t require any special forms or paperwork) to a more complex structure, such as a corporation or LLC. Different types of business structures offer different tax benefits and other protections, so it’s important to thoroughly explore your options and select the structure that’s best for your unique needs. Establishing your business under your desired structure may require help from a legal or accounting professional.

3️⃣ Failing to Apply for an Employer Identification Number

Unless you plan on operating your business strictly as a sole proprietorship (in which case, you will use your personal Social Security number when filing taxes), you’ll need to apply for a unique Employer Identification Number (EIN). This number will be specifically associated with your business, and it’s helpful to think of it as a business Social Security number; it’s used to file your business taxes, open business bank accounts, and more.

4️⃣ Overlooking Important Permits and Licenses

Depending on the specific industry in which your business will be operating and your location, you may also be required to obtain specialized licenses and/or permits in order to legally operate. Otherwise, you’ll run the risk of being shut down or finding yourself in serious legal trouble down the road. Take some time to research the specific types of permits or licenses that you may need to obtain, as well as the steps you’ll need to take in order to acquire them. Sometimes, this process can be time-consuming and even costly, so it’s not something you’ll want to put off until the last minute.

5️⃣ Not Knowing When to Speak to a Professional

When starting up a small business, it’s not uncommon to run a one-man (or woman) operation. After all, you may not have the cash flow or even the need to hire outside help in the early stages. Still, when it comes to making sure your business is squared away from a legal/compliance standpoint, it can certainly be worth the money to consult with tax and accounting professionals early in the game. You don’t necessarily need to onboard these experts full-time, but being able to turn to them for advice and guidance when you need it will help you avoid serious legal issues later on.

6️⃣ Putting Off Domain Name Registration

As soon as you have your business name picked out and registered, it’s also in your best interest to go ahead and register your website domain as soon as possible. Even if you don’t plan on setting up and launching your website any time soon, domain names are cheap, and having yours registered now will help you avoid a situation where the domain name you want is taken by somebody else later on.

7️⃣ Lack of a Comprehensive Business Plan

One of the biggest mistakes small business owners make when first starting out is that not having a well-thought-out and articulated business plan. A business plan is an important document that outlines in detail what your goals for your business are and how you will achieve them. This document is important not just for you and other members of your immediate team, but for potential investors as well. Should you seek financing for your company at any point, an investor is going to want to see and scrutinize your business plan — and it will likely have a major impact on the final decision.

8️⃣ Not Having Finances Squared Away

Another common mistake new business owners make is poor financial planning, which can lead to a lack of funding to get you through your first months successfully. Ideally, your business plan will account for all company-related expenses during the first year of operation, as well as personal expenses. Many small business owners overlook or miscalculate these with disastrous results. The easiest way to avoid this mistake is to consult with a small business accountant during the early stages of drafting your business plan.

9️⃣ Failing to File Patents on Products or Ideas

It’s (hopefully) no surprise that you’ll want to be proactive about filing for patents for any unique products, prototypes, or designs you may have. However, many small business owners don’t realize that they’ll also want to file patents on ideas, such as intellectual property, that could otherwise be stolen or copied and used by other entrepreneurs. Intellectual property can be just as valuable as a product prototype, so you’ll want to protect these ideas accordingly. Be careful to avoid waiting too long to file for relevant patents; the process can be long and drawn out, so getting started early will be in your best interest.

🔟 Being Blind to Important Compliance Requirements

Last, but not least, make sure you’re aware of all compliance requirements that may apply to your business based on its structure, location, industry, or other factors. For example, even if you’re operating as a sole proprietorship, you’re required to file and pay quarterly estimated taxes. Failing to meet compliance and other requirements can result in serious legal trouble, including fines and penalties. Keeping a calendar of important dates is a good idea so you don’t forget anything. This is yet another situation where having a compliance expert, such as a tax or accounting professional, can be invaluable. They can assist with annual compliance reviews, reminders on impending deadlines, and more.

Ready to take the next step in your business journey?

From selecting a name and business structure to making sure your small business remains in compliance at all times, there are a lot of opportunities to make mistakes as a new business owner. By keeping this information in mind and working alongside the right professionals as you prepare to launch your new business, you’ll be able to avoid these issues. From there, you can maximize your chances for success in the first year of operation and beyond.

Contact us today for personalized advice on setting up your small business and choosing the right business structure. We’re here to help you get off to a flying start!

2024 Startup Questions Every Entrepreneur Should Answer

Starting a small business can be one of the most exciting and rewarding events in an entrepreneur’s life. But it can also be extremely stressful. If you’re thinking about becoming an entrepreneur, you might have more questions swirling around in your mind right now than you can count.

The Top 10 Questions Every Entrepreneur Needs to Answer About Their Startup

Before moving forward with a new business idea, ensuring you know the answers to these questions is crucial.

❓ Does your startup idea meet a need?

Before starting a small business, you need to know if your product or service will meet a need in your target market.

It doesn’t matter how special your potential product or service offerings are to you. If you can’t convince others to care about them, your small business won’t be a success.

❓Is your plan feasible?

Learning things on the fly isn’t smart in the business world. Rather than taking a blind leap of faith, determine if your plan is actually feasible before moving forward.

For instance, will you be able to afford to put your plan into action? Will your loved ones commit to the ways this venture might affect them? Starting a small business isn’t for the faint of heart. Do you have the ambition and determination to see your vision through?

❓How much financing do you need?

Not adequately estimating financing needs is a common mistake for entrepreneurs. To avoid this pitfall, strive to perform an accurate cost analysis. Approximate both foreseen and unexpected expenses for the first year.

Also, determine how long it will take you to become profitable. When creating a cost analysis, be realistic. Don’t count on things going perfectly. Despite your best efforts, they most certainly won’t.

❓Where will your company be located?

The type of small business you want to start will largely determine where it should be located. For example, you wouldn’t attempt to open a ski lodge in sunny, balmy Florida. Generally, you’ll want to find a location with lots of foot traffic. If you’re a new entrepreneur looking to break into an already crowded market, locating your business near your competitors might be a good idea.

You’ll already have a built-in market in the location. But if you’re competing in a saturated market with major brand-name competition, locating your business a short distance away from your competitors may be your best bet.

❓Who will comprise your customer base?

If you’re thinking about starting a small business, you likely already have a vague idea about who will comprise your customer base. However, delving into the profiles of potential clients of your company is a smart idea.

During this research, you can study characteristics such as age, gender, buying triggers, and general preferences. This should help you fine-tune your marketing efforts and target your products or services to the people who would most benefit from them.

❓When can you expect to be profitable?

The old adage is that you should expect to wait at least a year until your startup becomes profitable. But times are changing. Innovations in technology and communication mean entrepreneurs can start companies with little to no overhead nowadays.

This rings especially true for service-oriented companies. Therefore, having an astute business plan is essential. A good business plan will help you predict when you may start turning a profit.

❓What setbacks can you anticipate?

The road to small business success can be a bumpy one, so anticipating setbacks is important.

Not meeting sales objectives: One of the most common setbacks is failing to meet revenue expectations. This can sometimes be blamed on overestimating the amount of business your company will generate in the early days of its existence.

Losing key people: The second setback startups can face is losing vital employees. If you plan to start a sole proprietorship, this isn’t an issue. But if you’re launching a business venture with one or more partners, someone might decide to jump ship. To prevent your company from disintegrating into shambles, develop an exit plan that can be utilized if a partner wants to get out.

❓Do you need solid advisors?

Starting a small business can be overwhelming. This is especially the case if you try to do everything yourself. Surprisingly, many small business owners handle their budgeting themselves. Unfortunately, only about half of small businesses survive beyond five years.

To boost your chances of long-term success, surround yourself with solid advisors. For instance, experienced financial advisors can help you with accurate budgeting. Legal advisors can assist you with contracts and permits.

❓How will you lure the best talent to your company?

Obviously, offering prospective employees a competitive salary can help you lure the best talent to your company. But when you’re just starting a business, this might not be an option.

To compensate for this, providing employees with growth bonuses is a good alternative. Offering employees flexible scheduling options and wellness perks such as an onsite gym, a break room stocked with healthy snacks, and standing desks may also attract promising talent to your company.

❓Should you start more than one company at once?

Do you have multiple ideas for new small businesses? Perhaps you’re eager to get more than one startup running at the same time. While this might be tempting, starting out with one company is best.

You can put all your energy into getting it profitable and stable. This will prevent you from spreading yourself and your resources too thin. You can always branch out later if your first business takes off. Starting a business can be quite an undertaking. Therefore, planning correctly and thoroughly is critical.

Answering these questions about your startup can be tough

Before you can enjoy small business success, you’ll need to learn the answers to the above questions. Don’t despair. This is completely normal. After all, it shows you’re serious about your business venture and care enough to want to do things the right way.

If you need guidance, give our business startup team a call. We’d love to help you turn your entrepreneurial dreams into reality.