Posted by Marian_in_CA on 2/2/10 1:11am
Msg #320673

Heard a VERY interesting story today...

I was talking a notary today back east who said she was recently audited by the IRS, and she got hammered. Why? Because she was constantly reporting a business loss on her taxes each year.

Why a loss? Well, she always took what the signing services offered her, $50-$65 a signing. She said she didn't think she had the "right" to ask for more. She said, "Well, they said the jobs paid that much so I just took what they offered."

Well, the IRS determined she was not operating with a profit motive, and said what she was doing was a hobby... not a business, and therefore, she couldn't deduct her expenses.

That's right... because she wasn't actively running her business in a way to make a profit, they essentially shut her down.

To make it worse, she KNEW the people hiring her were making at least double what they were paying out, and she STILL took the work.


This is for those of you out there who need to learn how to run your business as a BUSINESS.

You can't just blindly accept an offer from a TC or service because that's "what it pays" or "that's what they were authorized" -- if you are running a business you need to cover your expenses AND operate with a profit in mind.


If you don't understand how to do that, you really should not not be "in business" until you know how to run one. This lady is a good example of that -- she's now on the hook for a lot of money to the IRS because she never ran her business in such a way that a profit could ever have been achieved. In other words... she was paying the TCs and SSs to work for them and not even getting all of her expenses covered.

For those that think this is extra "pocket money" -- have you really added up the true cost of what you're doing? Are you really making anything? I'm willing to bet you're not.

Reply by JanetK_CA on 2/2/10 1:17am
Msg #320674

Wow!!! Important information! This says it all! n/m

Reply by Marian_in_CA on 2/2/10 1:47am
Msg #320675

No kidding, right? I had never considered...

at least, not from the IRS perspective, the idea of operating a business that way. I called my accountant friend who backed it up, too. He said that if you're taking business expenses, the IRS expects you to actually be operating as a business, operating in such a way that show you intend to make a profit. If not, they consider it a hobby.

Reply by WDMD on 2/2/10 4:58am
Msg #320677

Re: No kidding, right? I had never considered...

Each case is different, and in some cases it would be worth challenging the IRS' determination based on the facts. You still can deduct hobby losses up to the amount of hobby gross income, just can't have a loss. Any hobby income also is not subject to SE tax.

Reply by WDMD on 2/2/10 5:01am
Msg #320678

Correction

"You still can deduct hobby losses up to the amount of hobby gross income, just can't have a loss."

Correction: Should have stated," you can deduct hobby expenses up to the amount of hobby gross income."

Reply by Cari on 2/2/10 5:34am
Msg #320684

....very very interesting, thanks for the excellent post! n/m

Reply by BrendaTx on 2/2/10 6:11am
Msg #320686

Moral of the story: Don't take a loss in your business

every year and expect the IRS to allow it.

I'd love to know how many years this person has been reporting a loss.

I'd hazard to guess if you report a lost 2 out of 3 years they might allow it. If you report a loss on that third year, watch out.

Reply by CopperheadVA on 2/2/10 6:30am
Msg #320689

Re: Moral of the story: Don't take a loss in your business

I agree, Brenda.

On a personal note, if I had two years in a row of loss in this business, I would hang up my notary seal and get out. I've been doing this since 2005 and have had a profit every year, some years more than others, but a profit every time. If you're not making a profit, WHY BOTHER???

Reply by PAW on 2/2/10 7:11am
Msg #320696

IRS has a "5 or 7 year rule"

A business needs to show a profit in 2 out of 5 or 3 out of 7 years to be considered a business for profit. Otherwise, the business may not be considered "for profit" and disallow many business expenses and thus deductions.

See IRC § 183: Activities Not Engaged in For Profit (ATG):
http://www.irs.gov/businesses/small/article/0,,id=208400,00.html

Reply by John_NorCal on 2/2/10 9:42am
Msg #320720

Re: IRS has a "5 or 7 year rule" Not just that but....

in audits an examiner will look at your experience. Has the taxpayer operated this type of business before? What steps have they taken to ensure a profit? Does the taxpayer have the expertise to a profit? There are a lot of questions they will ask, and if you don't have the right answers they will disallow deductions above your actual receipts.

The moral here? Keep good records and pay particular attention to what you should be charging vs. what "they" want to pay you. The IRS is paying particular attention to schedule C filers where there has always been a very high percentage of abuse and under reporting.

Reply by Moneyman/TX on 2/2/10 10:09am
Msg #320726

Re: Moral of the story: Don't take a loss in your business

My understanding is that the IRS will allow a business to take a loss for 3 out of 5 years. Brenda is right in that if you take a loss on the 3rd year you might be flagged by the IRS.

I have been self employed since '94 (different businesses) and have only been audited once. After I finished with the audit, it was found that I did not take all the deductions I was allowed and they owed me money. To be sure, this is not a typical result of an IRS audit.

In any case, you have to always operate your business as a business.

I am not an attorney or CPA ... this advice is not meant to be legal advice, check with your atty's and CPS's

Reply by Moneyman/TX on 2/2/10 10:16am
Msg #320730

Correction on # of yrs for a loss .. see msg #320696 below

Thanks Paul

Reply by bagger on 2/2/10 12:01pm
Msg #320755

Re: Voice of expereince.

This is nothing new. In my younger years, I was a GS/HS Basketball ref. After three years of showing a loss, I got a nice little reminder from the IRS, that basically said, "We know what you are doing, now stop it. Either show a profit next year, or this is not a business."
Every ref in my area got the same letter!

Reply by BobbiCT on 2/2/10 7:11am
Msg #320695

IRS "business for profit" ...

"... the IRS determined she was not operating with a profit motive ... what she was doing was a hobby... therefore, she couldn't deduct her expenses ... because she wasn't actively running her business in a way to make a profit ..."

Very nice reminder to NSAs at tax time. For me, this is ancient news. The IRS clearly states that your business needs to make profits to be defined "as a business." This Is An Excellent Reason To Write Up Your Business Plan Before Your First Assignment! Know before you go whether a $50 signing will give you a reasonable NET Profit margin. You can have some bad years (most businesses do); however, in an audit being able to document a profit/loss business model and some good years can show that your intent is to manage a "business," not a hobby. Worked for many small businesses who went thru the "loss" audit process and survived it; had a few profitable years (some very good, some not so good) and some that closed shop within three years because they didn't make a survivable profit margin and couldn't see how they could achieve this in future years.

Artisans who create jewelry, paintings, fabric goods, grow produce, make james and pies for sale at farmer's markets and craft fairs are very familiar with this IRS trip-up for the unwary.

Reply by lowerAL on 2/2/10 8:32am
Msg #320706

Re: IRS "business for profit" ...

This is a great story. It should be a reminder for everyone to set their fee at a higher rate. In my market I have turned down $45, 50, and 65.00 for e-docs to print and travel 30-45 miles one way. They obviously found someone to accept the very low fee. Everyone in this business should have rate integrity. It hurts our entire business as a whole. Stick to your fee and make a profit. This is a business and should be ran like one. You cannot go in Wal-Mart and tell them that you don't want to pay their price and make them an offer and they say, well ok.

Reply by MW/VA on 2/2/10 8:40am
Msg #320707

Timely post, Marian. Thanks. n/m

Reply by Notarysigner on 2/2/10 9:25am
Msg #320713

Great post Marian..thanks for the info n/m

Reply by Moneyman/TX on 2/2/10 10:10am
Msg #320727

Great post and timely as well.

Reply by dickb/wi on 2/2/10 1:51pm
Msg #320794

great post marian....i have been self employed for.....

the last 55 years and was aware of the irs requirements on this. you wrote it well and maybe some of these people who take the losing signings will take a good look at thir business modle and put it on the profit track......maybe this was a plus for those of us who do this full time and maybe just maybe our fees will see a return to what they shoud be....thanks for posting this.....maybe u should post it on GMN also and some of the other forums.....

Reply by Larry/IL on 2/3/10 10:21am
Msg #320959

Re: Heard a VERY interesting story today - MORE INFORMATION

Hi All, I am a FULL TIME NSA, I also do taxes during the season. I have already been taking the certification test that the IRS is proposing all preparers to start taking in the near future. Please remember when it comes to the IRS there are many exceptions to many rules, some not very well known. In regards to losses on self employment activities from Pub 535.

In determining whether you are carrying on an activity for profit, several factors are taken into account. No one factor alone is decisive. Among the factors to consider are whether:

* You carry on the activity in a businesslike manner

* The time and effort you put into the activity indicate you intend to make it profitable

* You depend on the income for your livelihood

* Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business)

* You change your methods of operation in an attempt to improve profitability

* You (or your advisors) have the knowledge needed to carry on the activity as successful business

* You were successful in making a profit in similar activities in the past

* The activity makes a profit in some years, and

* You can expect to make a future profit from the appreciation of the assets used in the activity.


The Key here is ALWAYS keep well organized records to substantiate EVERY deduction, the IRS will be hard pressed to disallow it. If you are a Full Time NSA you have much less to worry about because the activity that shows a loss year after year is your only means of making your livelihood. Lastly if the area of the country you live in and your overhead and living expenses allow you to take lesser paying jobs do not worry about the IRS disallowing your deductions. It's always best to try to negotiate your best rate. If the person on the other end of the phone says that's all they can offer, it's your call whether to take the job, but at that point the rate is beyond your control, (one of the IRS considerations; CONTROL). Because I do taxes it helps with the way I run my business. I believe everyone might find some benefit from reading some of the IRS publications relating to their business. You'll be able to keep your taxes in check, substantiate and take every deduction possible, even if you show a loss every year. I hope this helps.

Reply by Moneyman/TX on 2/8/10 1:22pm
Msg #321926

Larry, GREAT info to keep in mind ..from a tax guy! Thax n/m