Poor Record Keeping...

= IRS DECIDES IT'S NOT A BUSINESS

In the recent Journal out from AIPB there was a very interesting article about a few small businesses that were run by a husband and wife team without good records.  Seems they each had a business, plus they also had a home sales distribution type business together. They showed mostly losses from the few years they were open so far, their records were not kept well, they took various personal deductions and wrote them out as business, like lunches and various bills. There weren't clear boundaries between personal and business items, even though they claimed it was all business related. 

Even though each company had a separate bank account and ledgers, etc. the IRS decided they didn't run the businesses well enough to make a profit, and that their records were incomplete and unreliable.  So the IRS reconstructed their own accounts, and of course, there were many changes.

As I have always said,  be careful when you are thinking about deductions.  If you can not make a profit at your business within a resonable time (2-3 yrs)  it becomes a hobby in the eyes of the IRS. The deductions you took go out the door and penalities and interest are their replacement.

Some caution goes a long way...