Love Losing Money on the Side?

Tax and Financial News for June 2016

Love Losing Money on the Side?

This might come as a shock to those who think the IRS has already been aggressive in enforcing hobby loss limitations, but the Treasury Inspector General for Tax Administration (TIGTA) disagrees. The TIGTA believes the IRS has been lax in going after hobby loss tax cases, and this is likely a harbinger for increased crackdowns on hobby loss deductions. The TIGTA’s most recent report also provides valuable information about what the service considers potential audit triggers and how to avoid them.

Hobby Versus Business

Nine factors are looked at in distinguishing between a hobby and a business activity. They are:

  1. How you execute the activity
  2. Your level of expertise
  3. How much time and effort you put into the activity
  4. The amount of occasional profits, if any
  5. Whether or not you think the assets used in the activity will increase in value
  6. Your financial status
  7. Prior success in similar ventures or activities
  8. Income or loss history associated with an activity
  9. Elements of recreation involved in the activity

Bear in mind that not all these factors are seen as equal. Let’s look at ways to protect yourself if you want to stay out of trouble.

Play Wait and See

The IRS makes the assumption that if you made money in any three of the last five years, then you are really in business and trying to turn a profit. Horses are the exception, where if you make money in any two out of the last seven years you are generally safe.

You can front-run the IRS and buy yourself more time in determining whether your activity qualifies as a business or a hobby by filing Form 5213. Form 5213 is an election that extends the make versus lose money presumption, but that extra time comes with the catch of extending the statute of limitations.

Put It Off Until Tomorrow

Suppose you lost money in your first two years. Now in year three things are not looking too good either. You can avoid the presumption that your activity is a hobby by deferring losses. If you can consider yourself as not “materially participating” in the activity, then your losses will be considered passive and you will not be able to deduct them on your return in that year. Instead they are suspended and carried forward so you can use them against a profitable year in the future.

Write a Business Plan

You can go a long way to help substantiate that your activity is a real business and not just a hobby by writing a business plan. Changing that business plan to adapt to circumstances helps even more. If you have losses year after year and are not documenting a concrete strategy to avoid it and turn a profit, that doesn’t bode well for you. The IRS knows people lose money on ventures, but they expect if you are running a business that you will try to avoid this by changing your strategy. No one in a legitimate business strives to constantly lose money.


Keep these actions in mind and you can avoid a lot of potential trouble with any side venture or business you engage in that does not make money right away.



General Business News for June 2016

Understanding Second-Stage Entrepreneurship

For the 10 percent of startups that survive, according to Forbes, there is what’s called second-stage entrepreneurship. But what, exactly, defines second-stage entrepreneurship and how do businesses know when they’ve reached it?

Recognizable Signs

When it comes to identifying a second-stage entrepreneur, there are some general guidelines that experts cite to define this stage of business. The first sign is when a business plan is replaced by long-term calculated marketing plans. Another sign is when a real estate decision goes from finding an initial location to adding on to a building or moving into a larger factory or office space. Other signs can include moving into another, complementary product or service line or expanding across the country or an international border. Generally, in more measurable terms, it’s recognized as a business employing 10 to approximately 100 workers and making anywhere between $750,000 and $50 million in annual income.

A Shifting Focus

Moving beyond these recognizable signs, a second-stage entrepreneur’s strategy moves from a narrow focus to the bigger picture. New challenges to survival in this stage of entrepreneurship include soliciting financing from either venture capital or angel investors. While this can provide a financial jumpstart to accelerated growth, business owners should consider the potential sacrifice of the direction of the company’s path when it comes to existing or new products or services. More established companies will be less concerned with survival and beating out competition and more concerned with moving into a creative path that can help distinguish itself from competitors.    

As a company grows and expands, it takes a careful eye for it to make it through this stage. One key to success is having a management team committed to coaching its sales staff to help them tweak their sales process and strive for increasing goals.

Another cornerstone of a second-stage business is when it dedicates specialized staff to curate relationships with customers to deliver personalized experiences, not just rote customer service practices. This external commitment to customer service can also translate to a supportive culture for all team members, helping them feel valued and promote a desire to continually want to contribute to the organization’s mission.

Considerations Moving Forward

One reason why some startups and second-stage business have an edge in succeeding is first identifying and then attempting to replicate the behavior of a star salesperson that helped to accelerate its growth. There are two approaches that can be taken after an exemplary employee is identified. The first is observing and replicating the behavior, as best as possible, by training new candidates in the same role based on what was observed from the high performing employee. Another consideration is balancing the candidate’s desire for a promotion with keeping them in the same role, letting them focus on the task they excel at.

For entrepreneurs at the second stage of an organization’s development, many of the same principles still apply as during the start-up phase. However, there are many more considerations to take into account when modifying one’s business plan as it morphs into a longer term business strategy and development plan for the future.



Tip of the Month for June 2016

Tip: How to Encourage Clients to Pay on Time

Clients who are slow to pay cause real problems for firms that provide them with products or services. They create more work for your staff and jeopardize mutual goodwill. If you are running a small business, slow payments can seriously disrupt your cash flow and threaten your firm’s livelihood. Here are a few effective tips that encourage prompt payment and minimize any possible damage to client relationships.

  • Always get it in writing. Regardless of whether the client is an old colleague or a family member, have a written, signed contract that sets out your billing rates, practices and policies. This should include an agreement on what constitutes prompt payment, discusses out-of-pocket charges and defines what penalties may be imposed if payments are not made promptly.
  • If payments are late, figure out where the problem lies. Ask your client what the problem is, and how you can help find a solution. Find out if there are some simple fixes that will get your invoices reviewed and paid faster. If the client has inexperienced staff, ask if you can help them understand your bills better. Encourage your clients to call to discuss any issues or questions rather than delaying processing. Ask what you can do to improve your procedures and you’ll encourage your clients to do their part to improve their efficiency.
  • Consider using incentives, like discounts for prompt payment, but be careful not to sell your services short. Be equally willing to apply disincentives, too, if you believe this will be more effective. Some clients pay more attention to the possibility of penalties.
  • Make sure your billing/invoicing is easy to understand and process. Accept automated paperless payments and offer several options – credit card, scheduled bank account payments or PayPal. Online payment systems can be convenient for both the client and your company. And, as an added bonus, online payments can be set up to send automatic reminders to the client until the account is paid.
  • Do your clients tend to require the same amount of goods or services each month? Would it make sense for you and your client to agree to a monthly retainer, or a recurring billing cycle? You will want to clarify what the retainer includes and come to an agreement on how overages will be tracked and billed.
  • Ask for an upfront partial payment from new clients. This works well in situations when the company (seller) is embarking on a project for a client that will require the company to pay workers and suppliers for the duration of the project.
  • If you are going to spend significant amounts of your firm’s money on out-of-pocket expenses (e.g. travel costs) and vendor purchases (e.g. raw materials) on behalf of clients, you should have an agreement in place that allows you to pre-bill or submit separate out-of-pocket charges for speedy settlement. Few factors may jeopardize a company’s bottom line faster than extending credit to a client in the form of paying significant out-of-pocket purchases on their behalf. Set a dollar limit on the amount you are willing to carry for each client. If you prefer to NOT carry these charges, work out an agreement to have major out-of-pocket expenses and vendor fees be billed directly to the client.

Decide which ideas will work best in your area of business, but avoid doing nothing. If you are expected to meet your clients’ deadlines and needs then you have the right to expect prompt payment for your goods or services.