Is it a business? Or is it a hobby?
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:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Do you depend on income from the activity?
- Are losses caused by circumstances beyond your control or did they occur in the start-up phase of the business?
- Have you changed your operations to improve profitability?
- Do you or your advisors have the knowledge needed to carry on the activity as a successful business?
- Have you made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Can…
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