Champion Method of Practical Business Writing by Mary Champion

By Mary Champion

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However, if your primary purpose is something other than making a profit—for example, to incur deductible expenses or just to have fun—the IRS may find that your activity is a hobby rather than a business. If this happens, you’ll face some potentially disastrous tax consequences. Example: Jorge and Vivian Lopez thought that they had found an ideal way to save on their income taxes (and enjoy themselves as well). They started an Amway distributorship as a sideline business. They ran the distributorship out of their home.

Instead, you must treat these purchases like any other long-term asset you buy after your business begins—you must either depreciate the item over several years or ­deduct the cost in one year under Section 179. ) However, you can’t take depreciation or Section 179 deductions until after your business begins. Research and Development Costs The tax law includes a special category for research and development expenses. These are costs a business incurs to discover something new (in the laboratory or experimental sense), such as a new ­invention, ­formula, prototype, or process.

For example, a home-based inventor who attempted to build a wind-powered ethanol generator in his backyard was found to be a hobbyist partly because he failed to get a permit to produce alcohol from the federal Bureau of ­A lcohol, Tobacco and Firearms. • Obtain a separate phone line for your home office. Set up a separate phone line for your business (which may be a cell phone). This helps separate the personal from the professional and reinforces the idea that you’re serious about making money.

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