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The IRS Wants to Know, Are You Running a Business or a Hobby?

Being a small business owner brings with it a whole host of challenges. Not only are you concerned with taking care of your client’s needs, getting paid and paying your vendors. You also have to be concerned with staying compliant with federal and state laws as well as local guidelines. Small business owners, especially sole proprietors, are at an increased risk of audit. The federal government believes that self-employed people are grossly under-reporting their income and over-reporting their expenses. According to the website Tax Help Online, “You might be shocked to learn that 20% of all small business audits involve disallowing deductions because the IRS reclassifies the small business as a hobby under the so-called ‘hobby loss’ rule.” Internal Revenue Code Section 183 (Activities Not Engaged in For Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule”. As a small business owner, it is your responsibility to make sure your business is viewed as a legitimate business in the eyes of the IRS and not a hobby.

Below, I have listed some smart business practices that will not only help you define and grow your business, but will also help you document that you are running a real business and not just performing a hobby.

1) Write a business plan. There are lots of local small business support centers that can help you to put your plan in writing. For example, the Small Business Administration has both local and online resources to assist you.

2) Determine your legal structure (LLC, Partnership, C-Corporation, S-Corporation, Sole-Proprietor).

3) Obtain an Employee Identification Number (EIN) from the IRS.

4) Open a separate bank account for all of your business transactions (deposits and expenses). You need to keep your personal and business transactions separate.

5) Establish a separate line of credit or credit card to use with your business. Put personal expenses on a personal card and put business expenses on a business card.

6) Keep your business documents organized. The National Federation of Independent Business recommends keeping business records and receipts for at least seven years.

7) File completed tax returns on time. This would include all required schedules and signatures. Depending on the type of organization you have, you or your CPA will be filling out forms like 1020, 1065, 1040 Schedule C, 1096, 1099, 940 along with calculating your self-employed tax. I highly recommend finding a local Certified Public Accountant (CPA) that is familiar with your industry to help you determine which forms you will be required to file and making sure they are submitted on time and to the right government office.

8) Hire a support team: A lawyer can help you with your legal structure and a Certified Public Accountant can help you keep your finances in order as well as keeping you compliant with local, state and federal government.

9) Create industry standard business documents and forms to include: logo, letterhead, business cards, and website.

10) Advertise in your local media along with appropriate trade periodicals.

According to IRS document, FS-2008-23, below are some of the questions that the IRS may ask when determining if your business is engaged in for-profit activity. You will need to be prepared to answer these questions and provide documentation.

1) How many hours a week do you work in the business?
2) Do you depend on income from this activity to pay your bills?
3) Do you have the knowledge needed to carry on the activity as a successful business?
4) Have you made profit in similar activities in the past?
5) Does the activity make profit in some years?
6) Do you expect the activity to make a profit in the future?
7) Are there elements of personal pleasure or recreation?
8) Has your business made a profit in 3 of the last 5 years?

According to IRC 183, “If your business activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.” The result is that your business deductions will now become itemized deductions and be limited to your hobby income.

For more information and assistance in helping your company maintain their position as a legitimate business, please contact a local CPA. Each state has its own independent licensing board. If you are located in North Carolina, you can contact the NC CPA Board website and click on their “Licensee search” button to locate a CPA near you. All licensed and active CPAs in North Carolina will be found on this website.

Electrical Contractor Business Ideas

I would like to share with you some electrical contractor business ideas.

I will be sharing some ideas that you may want to think about if you are currently in business as an electrical contractor. Or if you plan on going into business in the future. Electrical contractor business ideas are just that, ideas.

But what about the electrical contractors that have followed proven methods for profitability, time freedom, and business systems. We could say that those business principles are ideas. But at some point when company after company after company create success, with those business systems. Those ideas become solid business principles that are proven to work time and time again.

I would like to go over some of those electrical business principles with you. Here I will list in bullet points some of the electrical contractor business ideas that I will be going over.

I wish I could just write one article and cover all of the basis that you need in order to have a solid foundation for your electrical business. I will list out the items I will cover. Check back often, as I will go through each one step by step.

I already know that almost everyone reading this, that owns an electrical contracting business will want to know what are the secrets to marketing.

How do I get the phone to ring?
How to get more jobs?
How do I find the best electricians?
How do I make higher profits?
How do I control labor and material cost?
How do I market correctly to increase my call volume during the slow time?
What is the silver bullet? Just give me the silver bullet.

These are all very good questions, and I will answer all of them. But what a lot of electrical contractors don’t understand or simply refuse to address is that it’s what you do that makes all of those things happen in your business.

So if you are someone who thinks that you can skip the small stuff, bypass the systems, ignore business numbers and systems then reading this is not for you.

But if you are tired of –
Feeling like you’re going in circles.
Tired of not having time to do much of anything outside of your business life.
Tired of not making the profits you know you should.
Tired of feeling like you are all alone in getting your business to that next level.
Tired of having huge gross profits, but small net profit.

Tired of being the marketer, book-keeper, electrician, call taker, etc etc.

Then read below and let me walk you through the first part of the system that has worked for so many other electrical companies.

Electrical contractor business ideas

Here are the subjects we will be training on and going over, in no specific order.

Marketing plan specifically for electrical businesses.
Understanding, tracking, and using your business numbers. (The 11 numbers you must know.)
Examining the health of your business as it is today. (The 20 vital statistics.)
How to increase profit in your business.
How to get more business because of your price increase. (I know that one sounds crazy.) Just wait!
Planning for growth
having a specific business plan that goes from where you are to where you want to be.
Managing employees.
Proper steps to go from a 1 man shop to 10 and maintain a very high profitability.
Daily performance reports
Developing a training plan.
Analyzing how your local market thinks about your business and what you offer.
Developing operational excellence.
Developing an exit strategy to sell or hand over your successful operation.
And much more…

Today I would like to start by asking you. When was the last time you sat down and seriously thought about what you want your electrical business to look like? And how much would you like to make in pure profit 5 years from now.

This is where I like to start, because I’m sure we all know of those electrical contractor business ideas or plans that went something like this.

They started their business 25-30 years ago. They are still working out in the field. They have to be there every day and are tired of dealing with putting out fires all day. Their bank account goes up and down just like their call volume does. They have very little or no retirement and drive a service truck that doubles as their personal vehicle. They have no idea who will buy the business after all those years of hard work and dedication, because without them the company will fold.

I could go on but the point is that regardless of where you are at today, you will only get to where you want to go if you know exactly where you want to be.

I will get to the meat like marketing etc, in another article but for now just take some time, sit down and think about how much money you would like to make. Is it 200,000 in pure profit? maybe it’s 1million in profit. What do you want to make? Write that number down.

Next think about how often you would like to come in to the office 2 hours per day, 1 time per week, 1 time per month, one time every 3 months. Even if you are there 12 hours per day now. Even if your current office is your home. It does not matter. just picture what and where you want it to be. Write down how much time you would like to spend working in the business.

If you do or don’t have a commercial office location, then what will that office look like? NOTE!!! on the office. Most electrical business owners do not see their business office as an asset. The electrical business will pay off this commercial property and you will be able to sell it at a profit when that time comes. Some people split up the building and rent out multiple commercial units for long term income month after month. Write down what that office building will look like.

Think about how well your business is running with systems. Even if you are currently are a 1 man shop. Think about and picture your electricians coming in the morning. How well the operations manager gets them in and out. how well the president that you put in place to do your task runs the company. think about how you can pull up any data that you want about your business numbers and operation on the internet from anywhere in the world. Write out exactly how your business flows and operates like a well oiled machine.

Now that you have a thought about how you want your company to operate and have your 5 year goals written out in detail. We can move on to the next subject. In my next article I will be discussing if you should go up in price and the common misconceptions that are associated with your product and service pricing.

“Taking your electrical business to profit ( on the fast track)”

P.S. If there are any specific areas of your electrical business that you need assistance with feel free to call or email me, and of course it will be (on the house.)

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What You Must Know About Vending Businesses

From an online marketer’s perspective, owning a vending machine business is not ideally suited for automation or scalability.

However, vending machines are big business. But this does not mean a vending machine business is right for you.

I know the appeal this business model has on people because I’ve “been there, done that.” Please, if you’re thinking about getting involved with vending, read this article first, and go in with your eyes wide open.

Aside from the obvious questions about machine price and delivery, here are 3 questions you must ask yourself and the person trying to sell you either vending machines or a vending machine business opportunity:

1. What is the mean time between failure for your machines?

You probably won’t ask the question quite like that, but the point is, you need to know how much it is going to cost to keep your machines operational and reliable. You may also want to consider whether or not you have the mechanical skills to do the maintenance yourself.

In my experience, some of the machines, and especially the currency acceptance devices, can be very difficult and expensive to repair. One piece of gum jammed in a coin receptacle could theoretically put your $5,000 in the back of the shop, out of order.

2. What type of products will I be able to sell with your machines, and will any of them require that I maintain a food service permit?

Amazingly, many potential vending entrepreneurs fail to consider this, and find themselves retrofitting their home warehouse to meet food service standards.

Also, in the section below I discuss the categories of vending products that sell the best. Hopefully, your machines will be able to market these.

3. Where can I put my machines? And, if the machines are already in place, how long can they stay there?

Perhaps the most critical point in this business is the placement of your machines in high traffic areas. Sadly, as a vending machine business owner, you will be faced with strong resistance in this area. After all, what’s in it for the property owner to allow your machines on his or her premises?

You may find yourself having to share profits with the property owner in order to place your machines.

The vending industry accounts for over $45 billion in annual sales volume, which is a substantial chunk of money. Very briefly, here are the key factors to success in this business:

1. Ability to buy and maintain quality machinery

2. Placement of your machines in high traffic areas

3. Control of employee costs

According to the Bureau of Labor Statistics, about 44,000 people work in the vending machine industry, with about 18% of those owning their own vending business, and a projected growth rate of 7% per year. At one time I was both an employee of a vending company and the owner of my own vending company.

In this exclusive report, I will discuss my personal experiences in the vending machine business, a few caveats you should consider prior to getting started, an overview of your potential to make money with vending machines, and a look at the current market and possible websites you can investigate further.

My Personal Experience

As an employee of a vending company I had a regular route where I serviced about 100 food and beverage machines. On any day I would normally have to deal with machine maintenance issues, customer refunds, expired food, and being asked to get my machines off the property, that day.

As an employee I took all of this in stride. It was just a job.

Several years later I decided to buy an existing vending machine business. I then learned just how hard it was to get machines placed in profitable locations. I also found out how expensive those “little” maintenance issues were. For example, to replace a dollar changer was going to cost me several thousand dollars. The sales at that particular location did not warrant that kind of expense, so I had to pull two snack machines and one drink machine to allow another vendor to come in.

I also dealt with vandalism on numerous occasions. At one time I got a call from my local airport where I had placed a phone card machine. I was informed that my machine had been broken into. I lost over $300 in inventory and about $100 in cash in that one incident.

Challenges To Success

There are essentially six challenges you will face in your drive to make money with a vending machine business:

1. Getting your machines placed in profitable locations

2. Maintaining and servicing your machines

3. Loss of product due to theft and spoilage

4. Labor and vehicle expenses associated with servicing machines spread around town

5. Liability issues related to machines and food products

6. Vandalism of machines

If you can generate enough profitable sales to cover these expenses, plus the value of your time, effort, and capital risk, then the vending machine business may be right for you. Keep in mind that there are companies that specialize in locating and servicing your machines, but their fees may not be realistic based on your projected sales and profits.

Making A Decision

I’m sorry I may sound a bit negative about the vending business, but believe me, I speak from hands on experience as both an employee and owner in this industry.

The idea of making money from your little profit centers spread all over town sounds great–but reality bites.

Do some solid research in this business before you jump in. At the very least, go to work for a vending company for a while and see what’s involved.

Vending Machine Statistics in U.S.

The sale of cold beverages represents over half of all vending machine sales, followed by non-refrigerated snacks.

Interestingly, while cold beverages sold in containers, such as bottles and cans, rank well in the industry, the “cup-drop” variety of cold beverages does not do nearly so well. In my experience, cup-drop machines may pose significant maintenance challenges, these machines are also fairly scorned by the consumer.

Within the cold beverage arena, vendors typically choose either a closed front, or glass front machine. The closed front currently dominates the market, but the glass front is gaining in popularity as the glass front allows the consumer to see the product, which in itself aids in the marketing of beverages.

Among cold beverages, soft drinks account for about half of all sales, with diet drinks coming in second. There is also a growing trend for marketing bottled water and energy drinks.

Within the snack category, rolled candy and gum represent only a fraction of the overall market, with candy bars and bagged pastries leading the way. Keep this in mind when you look at snack machines.

You want a machine that can handle the bestselling product categories. If you commit to a machine that only allows gum, or small rolled candy, you may be limiting yourself.

Of note, the hot selling bagged pastries and chips typically require dispensers specifically designed for those package sizes. Again, this was a mistake I made when purchasing snack machines, and found myself sorry that I was not able to offer more variety to my customers.

While it is hard to quantify, I am sure there were many missed sales opportunities as a result.

It should also be noted that a snack machine should almost certainly have a glass front. The customer’s ability to see the product is essential in this category.

Should You Hire Employees?

According to the U.S. Census Bureau, the majority of vending machine firms retain employees, with some of the larger ones having as many as 66,000 employees. Ideally, you would want to start your vending company without employees, and hire route service people as your machine placements and profitability grow.

As an employer, let me expand on why it so important to carefully manage the hiring and retention of employees in your small business.

If you want to make money and eventually attempt to allow employees to manage the bulk of the day to day activity in your business, keep in mind that vending machine employers often pay near minimum wage to its employees, which means you will have a high turnover of employees. Additionally, keep in mind that your employer costs will represent between 22-25% of base wage expenses.

For example, if you pay an employee $10 per hour, your true cost will be around 10×1.25 = $12.50 per hour. Given an 8 hour shift, you would need to realize $100 in profit from your sales to breakeven with this one employee.

In my experience, I was able to sale my products with a typical 25% mark up, with between 2-5% in product loss due to theft and spoilage.

That means you would have to sell over $400 in product to breakeven on your employee costs for that day.

Additionally, costs not even considered here are the expenses associated with operating a truck driving around town for hours each day.

Is it any wonder that some vending company owners choose not to hire employees?

Additionally, you need to think about the health care and insurance implications associated with hiring employees.

Law Of Large Numbers: 3 Ways to Make More Money

The Law of Large Numbers basically states that success in any endeavor is directly related to the number of trials and failures. This is particularly true in the area of small business, especially the vending machine business.

In any business there are ratios, percentages, and customer conversion rates that impact how that business is operated, and its profit potential.

Operating a profitable vending machine business is no different, so, knowing the numbers that govern your success is critical, and comes back to what I call The Law of Large Numbers.

Here are three suggestions for applying this law to your vending machine business…

1. Find Your True Sales Conversion Rate

Understand that success requires a much larger number of trials and failures than you may realize. For example, some marketing programs will tell you that their product offer converts to a sale for every 20 people who pass their machine.

However, in reality, your experience may suggest it actually takes up to 100 visitors to generate a sale.

Knowing that conversion rate is important, and although sometimes it may prove difficult to accept, knowing the truth is the only way to stay motivated and progress in the vending machine business. Do not accept assumptions or marketing sales pitch data when you are attempting to buy into the vending business, add machines, or chose locations for your machines.

Much of this data will come from experience, but you can also conduct research online using government vending association websites. One word of warning: Do not accept the sales figures and profit potential published by the manufacturers or suppliers of vending machines. Obviously, they are in the business of selling machines, and their data and survey results may tend to over state the profit potential.

If you purchase a vending machine and expect to get the results a vending machine supplier advertises, you may be disappointed.

2. Know Your Costs and Profit Margins

If it takes an average of 20 visitors to your product offer to make a sale, is the profit potential worth the effort, time, and expense to place and service a machine in that location? For example, if you place a machine in a factory that employs 500 people, you may be able to expect around 25 product sales per day. If each product offers a 50 cent gross profit after wholesale product prices and location fees are considered, is the $12.50 in profits for this machine worthwhile?

It may or may not be, depending on your other costs, including employee expenses, number of times per week the machine requires servicing, and your return on the investment in the machine.

These are important numbers to consider before investing in the vending machine business. If you don’t have a clue what these numbers are, you may not be ready to take the plunge.

3. Put Your Marketing Into High Gear

Finally, if the conversion rate, costs, and profit margins are acceptable, you should consider ramping up your marketing efforts to the maximum sustainable rate to capitalize on the profit potential.

For example, if you could consistently make a profit off of one machine, after all expenses are factored in, what would happen if you had 10 machines placed in comparable locations? The answer lies in the Law of Large Numbers. As long as it remains profitable to do so, add machines and grow your business.

Final Thoughts on Vending

I’ve come down pretty hard on vending in this article, but the point I’m trying to make here is that just because a business industry has potential, or built-in consumer demand, does make it an automatic winner for you.

In any business endeavor you pursue, act like a pro:

1. Keep an open mind.

2. Do you due diligence.

3. Decide if the business is right for you or not.

4. Take massive action.