Small Businesses: Getting Started

BOSTON (CBS) - Small Businesses are defined as having less than 500 employees and according to the SBA:

• There are almost 28 million small businesses in the US
• Over 56 million workers are employed by small business, which is about half of the nation's workforce
• Over 50% of all small businesses are home-based
• 23 million small businesses are sole proprietorships

These are the individuals we will talk about this week. The really small businesses, the one person firm.

We have a huge underground economy in this country. It's a cash only economy. Individuals think that they will have more money in their pocket if they don't share it with Uncle Sam.

That may be true, but if you don't pay taxes whether they are income taxes, social security or Medicare taxes you will not be eligible for future benefits.

I am not recommending anyone pay more taxes than they should, but you do need to report all of your income and then look for the deductions you are eligible for as a self-employed individual.

The IRS has a section for small businesses on their website and they do offer some good advice.

They even have links to a tutorial on writing a business plan. Request publication 583, Starting a Business and Keeping records and publication 334, Tax Guide for Small Business to get you off on a good start. Both can be downloaded from the IRS' website.

Another helpful government resource for the small business owner is the SBA,  Small Business Administration; they have key information on running your business and where to get financing. And they offer webinars and consulting as well as seed money.

Another good resource would be a good accountant, a CPA, as you struggle to start your new business. Well worth the dollars spent!

Check out the many books available for starting your own business whether it is a day care or a landscaping firm. Both the Complete Idiot Guides and the Dummy series have some good offerings.

One more thing:  Is your business a hobby?

Five Tax Tips about Hobbies that Earn Income

Millions of people enjoy hobbies. They can also be a source of income. Some of these types of hobbies include stamp or coin collecting, craft making and horse breeding. You must report any income you get from a hobby on your tax return. How you report the income is different than how you report income from a business. There are special rules and limits for deductions you can claim for a hobby. Here are five basic tax tips you should know if you get income from your hobby:

1. Business versus Hobby.  A key feature of a business is that you do the activity to make a profit. This differs from a hobby that you may do for sport or recreation. There are nine factors to consider when you determine if you do the activity to make a profit. Make sure you base your decision on all the facts and circumstances of your situation. Refer to Publication 535, Business Expenses to learn more. You can also visit IRS.gov and type "not-for-profit" in the search box.
2. Allowable Hobby Deductions.  You may be able to deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is helpful or appropriate. See Publication 535 for more on these rules.
3. Limits on Expenses.  As a general rule, you can only deduct your hobby expenses up to the amount of your hobby income. If your expenses are more than your income, you have a loss from the activity. You can't deduct that loss from your other income.
4. How to Deduct Expenses.  You must itemize deductions on your tax return in order to deduct hobby expenses. Your costs may fall into three types of expenses. Special rules apply to each type. See Publication 535 for how you should report them on Schedule A, Itemized Deductions.
5. Use IRS Free File.  Hobby rules can be complex. IRS Free File can make filing your tax return easier. IRS Free File is available until Oct. 15. If you make $60,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. You can only access Free File through IRS.gov.

You can get Publication 535 on IRS.gov/forms at any time.

Additional IRS Resources:

• Business or Hobby? Answer Has Implications for Deductions
• Publication 525, Taxable and Nontaxable Income
• Publication 529, Miscellaneous Deductions
• Publication 17, Your Federal Income Tax
• IRC Section 183: Activities Not Engaged in For Profit (Audit Technique Guide) – details on the factors to determine 'for profit' or 'not-for-profit'

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You can hear Dee Lee's expert financial advice on WBZ NewsRadio 1030 each weekday at 1:55 p.m., 3:55 p.m., and 7:55 p.m.

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