Whether you are working from home as a freelancer, or trying to start a local business that you hope will branch out someday to include your entire family, you have to know about profit and loss. It is simple enough, but if you are not aware of how this works with many businesses, you may get lost or even give up on your endeavor too soon. You have to have a profit to survive, but do you know how long you should wait for this to happen? Do you know what a profit or a loss could mean for your business? A little understanding will help you along the way.
If your business has a problems with profit and loss, hopefully it is in the beginning. Most businesses have losses the first year and even the second. It is rare that you bring in enough to cover what you have had to put into a business to get started. That does not apply as a freelancer, however, unless you have had to put a lot of money into equipment for what you do. When you do your taxes, your losses can often be written off, but not always. At some point, the IRS will stop treating you as a business if you constantly report a loss.
If you have made less than you spent, the profit and loss equation is out of balance, but with a new business, this is okay. As long as you show a profit for three out of five years, you can still file business expenses to offset some of your losses. You may even be taking good money home while still showing a loss. However, after a while, you will be considered a hobby rather than a business, and you will no longer be able to write of your business expenses. That is when things get hairy for most home run, freelance businesses.
What can you write off in regards to profit and loss? Anything you have spent to get your business going is a loss, so to speak. It is a write off as long as it falls within the guidelines set forth by the IRS. If you are not sure, make sure you hire someone to do your taxes for you. You can have a CPA that works with you throughout the year, or you can keep track of your records on your own and then hand them off to a professional when the time comes to file your taxes. They will know what can be a write off and what can not, and they should help you see a better picture of where your business stands to date.
Your profit and loss balance should weigh towards profit by the end of five years when you are running a business. If you are a freelancer, you should see a profit the second year, or you may have to look into another line of work, as you do not have as much overhead. Therefore, your income is too low. Whatever the case, you have to give your business some time to grow and get over initial losses, but you also have to know when you should be bringing in a profit. If you have not by them, you have to make some drastic changes, or call it a day.