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.

As our raving fans know, our passion is to help the entrepreneur, solopreneur, mompreneur, and small business owner succeed financially.  We find that most of our clients and fans feel this impending doom first quarter of any new year.  First quarter is when business owners think about possible financial sins they committed in the previous  year (e.g. not keeping up w/their books, or the condemning box of disorganized receipts hiding under the desk ), they  dread the weeks leading up to April 15th,  and all the work it takes to get ready for that appointment with the tax person.  A bunch of time and energy is wasted Jan-April of every year cleaning up the financial sins of the year before and many of our clients miss the opportunity to set up financial systems and strategies to avoid what they’re cleaning up.  It’s a pitiful cycle. 

Nobody is perfect, and everybody is busy.  So cut yourself some slack, and read up on What Do I Do Now (WDIDN) if you’ve had some financial indiscretions in your business during 08:

4 Financial Sins and WDIDN (What Do I Do Now?)

Sin #1:  Good intentions, lack of follow thru.
Did not keep up with the “books and records” part of my business.  Subscribed to Prosperity, but didn’t actually use it (I wanted to though!).

WDIDN? If you were more naughty than nice in actually using Prosperity last year, we do NOT recommend you go back and enter a full year of income and expenses line by line.  No, no, no!  Not unless you have nothing but time on your hands. Instead, make a commitment to fulfilling the “good books and records” requirement that IRS has for your business for 09…and move on.  In order to do your taxes, your accountant needs a comprehensive total of your business income and expenses.   If you would like to learn a work around in Prosperity so you can have “some” records for income in 08, sign up for our It’s Not Too Late for 2008 webinar or contact our education team support@prosperityapp.com  

Sin # 2:  Shoeboxes, ashtrays, and handbags, oh my!
I have business receipts stashed all over the place—junk drawers, shoeboxes, handbags, etc.

WDIDN? Envelopes.  Get 12 paper envelopes and label them January – December 08.  Organize the receipts by the month and stuff them into the right envelope. Make sure every receipt is clearly readable, and that it’s is noted with appropriate documentation about what expense category it is related to. Examples:  Supplies, Gas, Biz Meals, etc. Take each envelope and staple it to the corresponding bank statement for the year. April envelope stapled to April Bank Statement.  

Tip for 09: Hang an envelope somewhere in your house or office, and drop all your receipts into that one envelope all month long. After you’ve reconciled your account(s) in Prosperity, staple it together w/ your envelope for the month.  Take the Categories and Receipts webinar.

Sin #3: My business has been sleeping with my family
I have been co-mingling business and personal funds all year long; and I’ve used my business bank account to pay for personal things (like clothing, groceries, presents, etc.). Whoops!

WDIDN? Stop doing it right now! Your business is your business; your personal life is your personal life financially. They must be separated. Separate bank accounts, separate usage-rules, separate everything.   Think it’s negotiable? Remember this:  If your business is audited at some point, co-mingling will open you up to a personal audit too. Always assume the position as a business owner, “It’s not a matter of IF you’re audited, it’s WHEN.”  

If you have been robbing-Peter-to-pay-Paul or just didn’t know any better, here’s our advice. Make sure you have clearly noted books and records and don’t try to write off something that isn’t a legit biz expense (e.g. life insurance premiums) to compensate for it.  Take the Setting Yourself up for Success webinar or request some time w/one of our financial coaches to help you get set straight.

Sin#4: Filed my bank statement and did nothing with it.
I did not reconcile my bank statement against my own books and records—that’s kind of a grey area to me.

WDIDN? The #1 way that identity theft is caught is by reconciling your own books and records against your bank statement. Have you ever noticed funny little charges that you couldn’t account for? (we found one from a domain company this month.) You only find those things when you reconcile.  We find that most people don’t reconcile because they were never taught how and they think it involves something about writing on the back of their bank statement in all those boxes.  Reconciling your statement to your records in Prosperity is a cinch! It helps you know what transactions have cleared, and will help you recognize financial trends of your business. To learn how to reconcile your bank statements, take the Reconcile and Anti-Identity Theft Webinar

Financial sins are easily covered up or forgiven.  We are standing with you in 09 to help you be an angel w/your finances and to be wildly profitable.

The Prosperity Team