From: cep@taligent.com (Christophe Pettus)
Subject: Tax laws for the self employed
Supersedes: <Bw2wy0.ALp@taligent.com>
Organization: Taligent, a little subsidiary of two really big companies.
Distribution: usa
Date: Tue, 13 Oct 1992 21:32:48 GMT

In article <1992Oct13.181306.16270@oracle.us.oracle.com> mlin@oracle.uucp (Micha
el Lin) writes:
>1)  What do I need to do to become a business in the eyes of the IRS?

You need to act in a business-like fashion.  There is no automatic rule
or form to fill out in order to become a business; the main rule that
the IRS applies is whether or not you operated your business with a
clear profit motive.

This doesn't mean you need to actually make a profit right away, just
that you had a reasonable plan to establish a profit-making business.

Things that tend to indicate that you were engaged in the business for
profit:

1. Clear, reliable accounting books which conform to generally accepted
accounting practice.

2. Maintaining separate books and bank accounts for the business and
for your personal finances.

3. A business diary in which you record business appointments,
activities, etc. separate from your personal diary.

4. Filing appropriate state and local forms for business licenses,
fictious business names, etc.

5. Preparation of a formal business plan.

The IRS is very careful of Schedule C (business expense) deductions,
since this is one of the last remaining really huge loopholes in the
tax code.  They are especially careful of computer-related expenses,
knowing that lots of computer programmers would like to claim that they
have a side business and write off all sorts of stuff.  Expect to be
audited.

(As a side note, my philosophy is that one should "audit-proof" one's
tax return, with the result that if one is audited, the amount of money
they'll collect will be trivial, rather than being excessively, um,
agressive and living in fear of an audit.)

>2)  What proportion of my business expenses can be written off?

100% of most expenses, but only 80% of most travel and entertainment
expenses; contact the IRS for publications on this area.

>3)  What types of business expenses can be written off?

(What a straight line! :-)  "Necessary and reasonable" business expenses;
in reality, this means that there has to be a demonstrable link between
the expense and the purposes of your business.

>4)  If I buy capital equipment (computer, printer, etc.) this year,
>       can I write it all off on this years tax bill or do I have to
>       depreciate it over x years.

This area of tax law is (un)reasonably complicated, and I would get the
IRS publication on depreciation (call 1-800-TAX-FORM) for more
information.  In general, you must depreciate capital expeditures
(which means most major office equipment and purchases) over $10,000,
with exceptions for so-called "listed equipment," which includes
computers and automobiles.

I would recommend getting copies of:

        1. Small-Time Operator, Bell Springs Press.
        2. The Legal Guide for Small Businesses, Nolo Press.

Also, finding a tax accountant who is (a) enrolled to practice before
the IRS, and (b) understands your kind of business, is one of the
absolute best things you can do to help your new business.

Good luck!
--
-- Christophe

"He presented it with a length of string, and then passed on to the
Statue of Corrupted Endeavor, there to await the arrival of autumn."
Newsgroups: misc.taxes,misc.invest