Hi, Can somebody help me with this Tax questions. All tips what I found on the internet are more applicable for e-bay business then for others. I didn’t find answers for next questions: 1) Haw to show to IRS that your expenses are ordinary and necessary (Except advertising on some well known sites, paying for domain name or hosting ) You do not have supplies, mileage , inventory etc, but you have to pay so many people somewhere in world for doing something for you (for small or big amount of $-s), without contract, or receipt. Can you tell that it is CONTRACT LABOR? How you can name it?? You have to buy so many small software that most of them on the end will not work for you and you will throw them (will not have a proof that you have it) only that you have is PayPal record that you paid to somebody email. You have to buy so many e-books, reports to learn this business, can you tell it is Continuing education? Again you will have usually only PayPal record: e-mail to e-mali. 2) How to do bookkeeping? What record to collect ? (in most cases except paypal record it is only e-mail correspondence. Do you need to define what expenses are for what your final earning or what your object of business. It is almost impossible because of so many things that you are doing and that this tings are connected. For example: you pay for Adwords for a site on which you are selling your book but after few months you are going to sell the whole site - expenses are for bought the site and the book. If so you will spend more time to keeping information than to working on that what have to make you profit. 3) In shedule C what to put on line A? (You are working in at least 3 NAICS Definitions of industry) It will be again impossible to file 3 C shedules. Thanks! Nikola
I'll do my best to answer your questions. First, understand that the IRS doesn't care how complicated it is to keep records. It is just something you need to do. You must have some sort of proof for every item you want to deduct. Try to get a receipt (even an email receipt) for everything you buy, and for everybody you pay. Including contractors, ebooks, software, etc. Without a receipt or paypal record you will have a hard time if you are audited. To show an expense is ordinary and necessary you have to show that it helps you make money. Yes bookkeeping takes up a lot of time. You still have to do it. I do mine at least once a week. I suggest getting a software program such as QuickBooks or Microsoft Money. It makes it go a little quicker, once you learn the program. Many people have more than one Schedule C on their tax return. At the same time, it is also possible just to pick one broad catagory and put everything there. I think that might be the best for you. If nothing seems to fit you can use 99999, unable to classify. I hope this helps! Remember, I may be a professional but it's not tax advice unless you pay for it!
Your paypal records are the receipt. Same with any payment source. That is why it is important to detail what was done and what you paid for. I have thousands in small expenses. Every domain purchase or renew, I simply print the receipt. If I paid someone for a service, I try to note it in the paypal payment so it shows on the receipt. An email deal with proof of payment should be sufficient. Remember, you don't need to send all of this in with your taxes, but you do need it in case of an audit. For now, I just give my accountant the raw numbers. So, I document $500 in domains names, and $800 in servers, $5000 for website development. He does my taxes with those numbers, and I maintain all the receipts until needed or 7 years.