This is an important question to ask yourself when you incur losses.  If the IRS determines that your business is indeed a hobby, they can come back and prevent you from deducting your losses on that business.  The most common example of this that I hear is the guy who loves to fish – let’s call him Joe Taxpayer.   Joe figures that he can become a professional fisherman – taking people out on guided fishing trips on Lake Wylie (usually a lot of his friends) and also competing in fishing tournaments throughout the North Carolina and South Carolina.   Now Joe can deduct the cost of his fishing gear, boat, gas, and all of the other ordinary and necessary items that he uses in his fishing “business.”  Or can he?  Is it really a business or is it a hobby?

In order to get to the root answer, the IRS is going to try to determine whether or not Joe had a specific intent to make a profit with respect to his fishing business.    In order for Joe to deduct his losses on the business he must be able to show that it is being run with the intent of realizing a profit.  Keep in mind that Joe doesn’t actually have to make a profit – as long as he intends to make a profit.

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The Tax Foundation released a special report on Monday that indicates that the “Amazon Tax” laws signal business unfriendliness and will worsen short-term budget problems. Currently, four states (North Carolina, Colorado, Rhode Island and New York) have some form of a  law that require Companies that have “affiliates” in their states to collect sales tax from their customers in that state.

For those that may be unclear as to exactly what an affiliate is, let me explain it as simply as I can and use Amazon.com as an example.  Amazon allows other website owners to post links or advertisements to their products on their website. In exchange, Amazon pays those website owners a small commission on the products sales that this generates. Simply put, these website owners are basically providing a targeted advertising medium to Amazon. What the “Amazon Tax” law does is it requires Amazon (or other Internet retailers) to collect sales tax in a particular state, even if Amazon has no physical presence in that state.

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I just read a great post over on Chris Brogan’s blog that discussed Price Points.  Apparently, quite a few of his other readers were shocked to find what he charges for a day of his time – $22,000.   Chris went on to give some direction at how he sets him pricing.  Chris doesn’t want hundreds of people signing up for a day of his time.  He wants two to three each month.

It all goes back to value.  When you are setting the value of your services or products, what is it worth?  Chris is a well known business strategist, but lets look at this same scenario in a typical small business – for instance a contractor who does home remodeling services.

Let’s look at two scenarios.  Jim Contractor has ten different jobs working at the current moment.  In order to win the bids on the jobs, he had to be the low bigger.  His expected profits was cut to the bone and he has to work around the clock to get them done on time – and if his budget is off – he will likely lose money on a few of the jobs?

Bob Contractor has only three jobs in process right now.  When he bid the jobs, he priced the jobs so that he could make a nice wage once the jobs were completed.  His prices were more expensive than Jim’s and he had a higher profit margin.  Bob has time to excel in not just the quality of his work, but also in building a relationship with his customers.  He is able to give them comfort that the job is being done right – providing that extra little bit of value in the eyes of his customers.  He also does not have to worry as much about making an error figuring up his job cost – if he is off a little bit, he isn’t as likely to go into the hole.

Who would you rather be – Jim or Bob?

There are thousands of Jim’s out there – fighting for that customer who is always looking to pay the cheapest price.  He is always struggling to win bids and a typical dinner time conversation is how he keeps getting underbid by his competitors – ultimately resulting in him lowering his prices even more.    Jim is selling a commodity.

There are only a handful of Bob’s.  Bob creates value for his customers.  I suggest you strive to become Bob.

I did a guest post over on Russell J. White’s Grow Your Business Blog discussing how a business owner should use the financial data within his business to know what items to concentrate on to fuel growth.

You can read the guest post here: Are you focused on the right target to grow your business?