Tax Tips for the Pampered Chef Consultant: Avoiding an Audit

[danielsdundee]

A gal from the gym and I were talking about taxes. I told her I'm a Consultant with the Pampered Chef and that I was inputting all my deductions and she told me that you can only show a loss on your business for only 3 years in a row then a red flag might come up for a poss audit. Is this true?? I'm working on my 3rd year starting next month and I'm freaked out about the poss of an audit. With all the mileage, ect that we do I can't see how you can not take a loss on your business. I do my taxes on Turbo Tax and feel really good now about doing it. Thanks for sharing your input.

 

[coriatc]

I've heard that too, but this is my second year, and I am actually in the black ... I don't think it's that hard to come out with a profit, even if it's just a little bit of one!

 

[mscharf]

I have heard the same thing. If I were you I would take out some deductions to show yourself in the black, by just a little bit. I think it would be worth it, to NOT have to deal with the IRS!

 

[danielsdundee]

I have about $1275 to take out to just get into the black...what am I doing wrong. I will go back through and take out what I can to get into the black. Is it better to be in the black or red when you have a business? What does it mean for your return? I guess I don't understand it. Everyone says write off what you can, but now this. AAAAHHH....frustating:grumpy:

 

[mscharf]

After three years, it is a red flag to be in the red, becuase ideally you should be making money, if your not they wonder why!! I am not sure what it means for your return, I would talk to your accountant before changing anything.

I don't want to give you wrong advice, I am by no means an accountant, so check with your tax rep!

 

[cmdtrgd]

From what I was told by my tax preparer last year (and I think you should consult one, too!) is that if you show a loss for three years in a row, they consider it a hobby, not a business. So, in your third year (and mine was only 26 months into my biz, I signed in October 2005 and they counted that as a "year") I didn't take all my deductions and showed a profit of $400 ish. I didn't pay taxes on it.As for making a profit, I have seen some commission checks that were $25,000 in one MONTH!

 

[pcchefjane]

As for making a profit, I have seen some commission checks that were $25,000 in one MONTH!

I sure want one of those! I'll settle for mine as it is now. I am only filing for my 2nd year as PC, so I am fine. I have my W-2s from my former job (I worked as hourly & salary, so got 2), my 1099 from Unemployment, and my 1099 from PC, so I am ready to file as soon as I get all my expenses posted in PC. I got "lazy" about October when I moved and quit posting weekly, so I have a bunch to do now! Most of it is mileage and copies plus some of my expenses for booths. Hopefully what I "lost" will counteract my lack of income tax taken out. I was in bankruptcy last year and so increased my deductions to 2 so I would not have as much taken out since the bankruptcy court got all but $500 of my refund each year. Then being out of work for 7-1/2 months, I ended up changing my Chapter 13 to Chapter 7 since I had so little income.We figured my taxes last night and am getting back $208! PC expenses saved me from paying $1,208!!

 

[jbdowd0798]

Last year I took a $1K loss (only in the biz 8months), but this year is $6K!!!!! Of course I went to conference, re-did all my packets, etc. So thats ok, but yes you can take a loss for the first 3 out of 5 years of the biz and then its considered a hobby.

 

[princessmeshelle]

once they consider it a hobby, can you get out of that "hobby" status? i thought if they considered you a hobbiest then your PC stuff was no longer a write off. so if that is true, how do you become a business again in the IRS's eyes?

 

[Jewel]

After three years, it is a red flag to be in the red,

We had an accountant at one of our cluster meetings (nov?) and this is correct. She said that after 3 years of loss you are considered a hobbyist, then it takes 3 years of profit to be considered a business again. I looked it up and it sounds like she is right. I just didn't write off all my grocery receipts or some of my office supplies so I could show a profit this year. :yuck:

 

[danielsdundee]

Thanks for all the insight on this. I have redone my spreadsheet and I out of the red and into the black by about $340. So we shall see what that means as far as our refund ect. Thanks Ladies

 

[ChefJWarren]

I'm $2263 in the red and thought I did pretty well this year. Do you enter all your "consultant gifts" as an expense? I was entering a portion of my internet and cell phone, groceries and am now considering taking that off. This would be my second year with PC taking a loss, but I took a loss with the other DS company I was doing before. Do they count them separately?

 

[troggt]

so what are the pros & cons of it being a hbby vs business?

 

[DebbieJ]

Tax questions are best answered by an accountant. I suggest that you contact one if you have questions. If you get audited, telling the IRS that your Chef Success friends told you it was okay will not fly with them!

 

[ChefJWarren]

I spoke with my Director last night about this and she suggested the same thing: ASK YOUR ACCOUNTANT! She has been doing this a long time and has no prob showing losses. I use H&R Block and submitted a question last night about this. This was their response:

"It is possible that your business may be considered a hobby if you continue to have a business loss year after year. Your intentions regarding your business is a factor in determining if it is a business vs. a hobby. If you are doing it with the intention of making money and making a profit then it is most likely a business. The 3 out of 5 year rule is a guideline to help determine as well, but it is not the only factor that applies. The amount of your activity and work in the business is also a factor."

I know what my intentions are and all the deductions that the IRS tells you to take are what put me in the red - which is good!! I will continue to keep meticulous records so nothing I do can ever be questioned, or at least I won't have to worry about not being able to back up what I do.

 

[ltkacz]

Just got off the phone with my CPA. He had a good point - do you think the auto companies have been making money within the past 3 years?? Do you think they aren't still going to take write offs when necessary? We had a long discussion about it. I would suggest that anyone concerned, please do talk with a CPA. I have seen first hand what the IRS can do to you - it's not pretty.