IRS believes home based, direct selling businesses could be a major source of tax revenue. Just to prove it, they’ve convinced Congress to increase their annual “enforcement budget” to $5.5 Billion dollars. This means the IRS will intensify its audits of small businesses and one focus will be home based businesses with losses.

Friends, that money will pay for a lot of audits! You see, IRS believes small businesses like yours are a major part of the tax gap, and they aim to get those tax dollars paid.

Now more than ever, businesses with a profit intention need to be mindful of the documentation you have to support your profit intention. When CPAs are worried, we should all be listening at full attention.

Do you?

*Have a home based business?

*Work hard to make a profit but still have losses?

*Worry about how the hobby loss rules may impact your business?

*Wonder if your business is a potential target of IRS, but don’t know what to do about it?

*Think it might be easier to quit your business rather than deal with taxes?

*Believe you should pay your fair share of taxes, but no more than that?

As you know, we at Prosperity are always teaching three business rules:

(1) PROVE INTENT RULE: You must prove that you have an intent for profit in your business. You do that by keeping diligent books and records in Prosperity (remember having appropriate “books” for your business is not negotiable–they’re legally required, and your Inventory program is NOT books). Sadly, you can’t pull the personality, busy, or “I don’t like numbers” card w/ IRS.

(2) COMPANY MONEY RULE: Every single dollar, every single cent of revenue generated by your business needs to be put in your business bank account (yes, even ProPay and PayPal dollars… NEVER apply those directly to an Order). No using your business bank account for personal things, and no co-mingling business and personal income or credit cards.

(3) YOU’RE NOT A DUMB BLONDE, SO DON’T ACT LIKE ONE: You’re in business, legitimately. You have all the rights and responsibilities that business owners have under the law. “Profit level inventory” is a phrase, but there is no profit in unsold products. Remember, you can’t even deduct the cost of the product until you SELL it. So sell your heart out. Revenue (sold inventory) is the cornerstone to a successful, profitable business.

With the IRS new initiatives and hefty budget to purposefully hunt for additional tax revenue from your business–implementing these 3 rules has never been so important to your business! If you’ve had good intentions and a few hiccups in execution, it’s not too late to start using Prosperity– if you don’t know where to start, feel free to call our sales office 509-456-6524.

Who is this enforcement budget aimed at?   The new enforcement (auditing) budget and parameters includes, but isn’t specifically targeted at, Direct Selling Professionals.  Much like other Business from Home professionals, Direct Selling Professionals who have shown losses, a history of losses, or hit-and-miss revenues may be isolated for further scrutiny. An audit itself is not a death sentence.

What do I do about it if my business fits the profile?
Don’t panic, but be smart. For years you’ve heard us teaching you about how you must prove you have an intention for profit in your business, even if you have a year (or series of years) with losses. We call this the Prove Intent Rule.  Intentions are hard to prove, but prove them you must. �

The primary activities you can “do” to prove you have an intention for profit are:

1.  Generate revenue by working your business.  There is no “business” without revenue.  Revenue is income resulting from your efforts in working your business.  (money from sales, commission checks, etc.)  Think like an auditor:   If there is little to no revenue, then why should business deductions be allowed? Smells like a hobby.

2.  Books & Records.  One of the primary ways you prove your profit intention is by your BOOKS, not by your Records.  (Records support your Books as backup documentation.)  Books are your own record of where your business money came from, where it went, how each financial decision (money spent) affected your bottom line, and the appropriate business reporting.  Records are things like your receipts, copies of your bank statements, your mileage log, calendar, and the stuff you see when you log into your bank’s website.  Think like an auditor: This business owner doesn’t keep an account of their cash flow or sources of revenue! Profit is a result of spending less than one makes. If this business owner is serious about profit, I don’t see it. Smells like a hobby and makes your business a perfect candidate for reclassification.

3.  Improve your business by constantly measuring your progress against your business plan. If you’re not profitable, ask yourself why and figure out the answer. (losses are not good, no matter what someone told you)  Your pay-less-tax-strategy can’t be “let’s not be profitable” if you are in business legitimately.  Think like an auditor:  If a business owner said to you,  “Oops, guess I didn’t make a profit this year; but I don’t know why.”  Smells like hobby, not good.

4.  Get lean.  Income-Expenses=Profit.   If you spending more than you are earning, then you need a Spending Plan (operations budget). Without one, it’ll be really hard to prove a profit intention to protect your right to take business deductions.  Think like an auditor: This business owner doesn’t use an operations budget and measure their progress against their goals? Smells like a hobby to me, they clearly don’t have an intention for profit here.

5.  Love isn’t enough. Believe it or not, IRS is looking at “elements of personal pleasure” in Direct Selling Businesses.  Whether it’s selling skin care or nutritional products, you can’t love the thing your Company “does” more than the money you should be making if you want to prove an intention for profit.  Think like an auditor: If you would do it for free because you love it so much, then you have no emotional incentive to navigate your business into Profit and it won’t matter if you’re not profitable. That’s the opposite of legitimate business.

What do I do if I get a notice that I’m being Audited?  You need to call your CPA immediately; they will deal with IRS on your behalf.  Do not try to save a few bucks (or) save face by attempting to do it yourself.   The budget has been allocated to audit more home-based business owners and Direct Selling professionals.  You’re an honest person, let you CPA professionally handle them directly; and you deal directly with your CPA. This will be less stressful and smarter all the way around.