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Profitability is just a proxy for whether someone is legitimately running a business, or just trying to save money on their hobby. Businesses can deduct expenses, hobbies cannot.
So if you are running an etsy store or an engineering company and buy a 3d printer to make parts, the cost of that 3d printer is subtracted from revenue for tax purposes. If your "business" is actually a hobby, it's not legally a business expense and therefore it's not deductible
(In the USA)
That makes sense. Since my profits always oscillated around zero, claiming any expenses had no practical effect.
That's actually how it started. We've installed linux on some old desktop machine with my classmate back in school, set up some services like webhosting, mail, jabber, and started to give access to people for free. No guarantees, no pressure. As we finished school, trying to turn it into a business was a logical next step. It never went big, but we just kept the thing around, bought newer hardware, moved it to a proper housing, did basic maintenance, and years later, here I am owing to the government thanks to my highschool hobby.
I’m not sure I understand why turning it into a business was the next step unless it was 1999. That market was saturated almost immediately. The web hosting may have had some potential, I guess.
It sounds more like you fell into exactly the situation that these laws are designed for—you had a big hobby, thought that made it a business, didn’t have a plan to make real money with it, and inadvertently may have committed some light tax evasion if you claimed anything as an expense. Hence, audited.
An audit isn’t an accusation of guilt, it’s an investigation into unusual or unorganized practices, which is exactly what you described doing.
Yes. Screw the small businesses. All that competition is just fraud and burden to the real corporations :D /s
Talk to an accountant if you haven't it sounds to me like you may be able to claim some deductions.
If for every $100 gross income you make you pay $20 in taxes and $80 in expenses you may be able to claim some of your expenses to reduce your tax burden.
This is a great explanation for why business deductions are stupid in the first place. Why does being profitable justify being even more profitable by paying fewer taxes?
It's not about encouraging profitability (that only one proof of a real company) as much as allow businesses to grow, without people faking businesses to write off personal expenses. Properly reporting expenses can allow new or growing businesses to reinvest in themselves. I agree that there should be a different structure for large business but I'll give a hypothetical to outline why it's important for small businesses.
Let's say a new family owned machineshop does $200k in sales in its second year. Pre-tax after all other expenses the business has netted $50k. Post tax (-$40k) they've got $10k left to reinvest. They want to buy $20k worth of machinery to grow the business. If they can deduct $20k for the machinery from the $40k in taxes the can buy it. If not they can't.
Meanwhile the large international conglomerate machineshop down the road makes $400k a year post tax. If the want $20k in new machines they just buy them. This isn't because they run a better business w/ better margins or product but because they have more volume.
Why is that a thing for businesses and not regular people? Why is it important for someone to pay 10% on a knife purchase, but a business doesn't need to pay the same thing when both situations end up with owning a knife?
The Federal government doesn't have a sales tax on consumer purchases goods that they charge regular people (-a few very specific things). Most sales taxes are done by states, some states have none.
And the business isn't dodging paying sales tax w/ deductions because again most things they spend money on aren't being taxed on purchase. They're having their amount of income the government can tax reduced as a reward for investing in themselves to promote economic growth.
Also private citizens have tax credits (which are preferable to deductions) too if they purchase certain things like EVs. If you buy a new EV the government will give you a few grand.
The IRS wants to encourage productive economic activity. Letting businesses deduct expenses can mean that later they end up employing people who buy stuff and themselves pay taxes.
Also cottage industries that barely pay for themselves are very inefficient and governments usually want to discourage them so you'll do something more economically productive with your time.
The IRS does not write tax laws.
Trickle down economics never works.
Under the Administrative Procedures Act they get to create rules to interpret the law. Which enables non elected officials who work there to make changes to how laws are implemented to meet their understanding of best policy.
https://www.regulations.gov/search?agencyIds=IRS&filter=Deductions%20
Winner takes all, I guess? Amazon has been so successful they became a literal monopoly (don't care to argue semantics of it, this is my opinion), and employs hundreds of thousands of people. They're so successful that the impact of causing them to pay their fair share might impact the economy in a larger sense. So they just let them have way more freedoms than small businesses?