By the  way - Individuals have to be aware of the test to determine if you are a business or a hobby!


Can anyone elaborate more on this? Is there a URL that you can put in numbers to determine if I am a hobby or business? Is there a ratio of gross sales to expenses that determines a hobby or business?

http://www.irs.gov/newsroom/article/0,,id=169490,00.html

Last I heard it was a 3 out of 5 year rule - it doesn't necessarily mean that you automatically get audited but it is a pretty big red flag.

Whether you have and LLC or Sub-S or File a Schedule-C, you can be caught up in the Information Sharing between the IRS andd each State's Revenue Departments.  In other words when Lisa filed as a Sub-S, The State of Florida received information/statistics on the various Individuals and businesses that presented possible audit potential.  In Lisa's case, she apparently had high income from sales and perhaps a significant upswing in Depreciation Expense.  The Depreciation Expense icreasing significantly indicates to the State that significant purchases were made.  That is when the Sales/Use tax deduction becomes interesting.  If Depreciation Expense goes up sharply and the Use Tax deduction was relatively the same or nonexistant, then Florida would select that particular return for audit.   

All Federal Agents and State Auditors have to conduct a pre-audit as I pointed out above to determine the potential for an assessment.  Jusr remember - the Fed communicates with the State and vice versa.  It does get more attention if you have a Corporation of any type as compared to filing as an individdual.  By the  way - Individuals have to be aware of the test to determine if you are a business or a hobby!  Try not to show more than one loss out of every three years and you will lessen your chances of an examination by the Feds.  Lisa has no problem there!

God Bless and have a great day!

Really interesting info!  I had suspected that the state was notified in some way.  The timing was just too coincidental.  Thanks for confirming my guess. 

As of Feb 1 I've been a Sole Prop for twenty years. According to my accountant, because it's just me, I have all the advantages of being incorporated and none of disadvantages.   

Very good to hear this.  My original accountant told me this too, but I listened to another one who told me how many thousands I would save by being incorporated.  The huge savings never materialized, and the accountant who told me all that turned out to be incompetent, as did the one after her.  Now I am back with the original accountant, and happy to have him file my final corporate tax return.

It sounds like Sole Prop suits most people just fine for microstock. But what about you folks who are doing client work as well? Do you prefer a Sole Prop or LLC for that sort of work?

I'm doing more client work lately and thinking that maybe I should file for an LLC. A bunch of my clients had to issue 1099s to me for 2011, and it was a bit odd to repeatedly be telling people that I'm a sole proprietor and the needed to use my SSN on the 1099. I'd rather be giving out a an ID number than my personal SSN.