Are you really in Business?

Are you really in Business?

One of the many weapons the IRS can use against you is not considering your business a business. When your business is not considered a business in the eyes of the IRS, it is considered a hobby. When this happens, all of your claimed deductions against any income generated from your business are disallowed. This can turn out to be quite unfavorable. This is because today, hobby expenses and losses are not deductible. Yet, any income you make from it is taxable.

The IRS considers the following activities as possible hobbies:

  • auto-racing
  • craft sales
  • bowling
  • stamp collecting
  • dog breeding
  • yacht charter
  • art
  • horse breeding
  • farming
  • gambling
  • fishing
  • horse racing
  • photography
  • writing
  • working as an entertainer
  • airplane charter
  • motocross racing
  • direct sales

This said, let’s make sure not just you, but also the IRS considers your business a business. This can be done in four simple steps.

  1. In the past consecutive 5 years has your business made any income after deductions in three of the five years? If the answer is yes then you are in the safe zone.
  2. Are you conducting your business in a professional business-oriented way? This poses the question of whether you are keeping your books up to date and other related records.
  3. Do you possess a level of expertise? Do you have knowledge or skill or series of skills that are relevant to your business?
  4. Do you regularly spend time dedicated to your business? Although there is no minimum amount of time you must work per the IRS, if you dedicate less than five or ten hours a week you will have a hard time convincing the IRS.
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