If your business has been losing a lot of money for a long time, the IRS could call it a hobby and stop you from deducting your losses.
Key to avoiding the “hobby” status is that your business earns a profit in three out of the last five years, including the most recent year. Here are some other factors:
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Does the time and effort put into the activity indicate an intention to make a profit?
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Do you depend on income from the activity?
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Are losses caused by circumstances beyond your control or did they occur in the start-up phase of the business?
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Have you changed your operations to improve profitability?
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Do you or your advisors have the knowledge needed to carry on the activity as a successful business?
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Have you made a profit in similar activities in the past?
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Does the activity make a profit in some years?
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Can you expect to make a profit in the future from the appreciation of assets used in the activity?
The IRS wants to prevent a savvy taxpayer from characterizing a hobby – such as stamp-collecting or dog-breeding – as a money-losing business.
For more information: http://www.irs.gov/newsroom/article/0,,id=169490,00.html
Reblogged this on Accountinator and commented:
Is it a business? Or is it a hobby?