HOL-Life: Part 6

Starting a Business

Starting a business can be a rewarding and exciting adventure. However, getting together the required documents needed to prepare your business’s taxes may be scary. In this article you will find out how to decide between if you have a business or if you have a side hustle, what information is needed for business taxes, and some tips to keep an organized business to make your life easier come tax time.

Before deciding on how to report a business on your tax return, you will first need to decide if it is a business or side hustle. Hobbies are typically described as for pleasure or recreation. Some questions to ask are:

• Do you carry out the activity in a businesslike manner and keep complete and accurate books and records?
• Does the time and effort you put into the activity show you intend to make a profit?
• Does the activity make a profit in some years – if so, how much profit does it make?
• Can you expect to make a future profit from the appreciation of the assets used in the activity?
• Do you depend on income from the activity for your livelihood?
• Are any losses due to circumstances beyond your control or are the losses normal for the startup phase of your type of business?
• Did you change your methods of operation to improve profitability?
• Do the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business?

You must take all of these into account when deciding and review all the factors to make the best decision for your activity. Once you have looked at these factors and decided that you have a business, you will need to gather the documents below for tax preparation:

• Profit and Loss statement
• Balance Sheet
• Statement of assets purchased and sold
• Inventory information if your business sells products
• Documents for all expenses to provide legitimacy of expenses
• Home business expenses if business operates out of your home

A Schedule C business is the simplest form a of business, as the income and expenses are entered directly into your 1040 on form Schedule C. Self-employment taxes are assessed on individuals with a Schedule C business. Some other business entity types are:

• Partnerships
• C-Corps
• S-Corps

There may be benefits to transitioning your business to one of these. Rental properties have their own special rules when renting out a place to individuals or business for the use of your building. Rental properties are very similar to a Schedule C business in what information is needed when filing your tax returns. The documents needed for rental properties are:

• Profit and Loss statement
• 1099’s based on rental income for year
• 1098 for mortgage interest and taxes pai
• Documentation for expenses paid

Rental properties are very similar as they are filed on a Schedule E instead of a Schedule C. Understanding the differences between business and rental properties can be a challenge so speak to an accountant with any questions regarding your particular business. If you're already a client, please reach out to your current contact as we will be happy to discuss this topic further with you. If you're not already a client, please call 724.934.4880 and we'll be happy to discuss your situation further to determine how we can best help.