BUSINESS OR HOBBY IRS VIEW
Tips for Small Business Owners
CAUTION!!! – – –BUSINESS OR HOBBY IN THE VIEW OF IRS ?
Be A Business – Not A Hobby!!!
With the number of new start ups and home businesses being formed today, it is vitally important to be aware of a real potential problem. If you are operating a home business, internet online marketing, or MLM, you are a prime target.
Let’s say you start a business – run it for 4 years all the while deducting your expenses as a loss against your income. Then in year 5 the IRS audits your business and disallows all of your tax deductions back to start of business on the basis of IRS Regulation Section 1.183-2. This could be a very nasty surprise, and devastate your small business.
Set Up Your Business Properly From Beginning
It would be wise to set up and run your business from the beginning in a manor that will protect you from the unhappy scenario outlined above. Be advised, the IRS is very active in pursuing this examination of small business under IRS Regulation Section 1.183-2. If the IRS determines that you are not engaged in activities to make a profit, then no deduction for losses is allowed.
Safe Harbor For Your Business
There is a “safe harbor” for presumption that your business is being operated as a business for profit. If your activity shows a profit for any three or more years in a period of five consecutive tax years, you are presumed to be engaged in a business.
The following is a list of IRS factors considered:
- Does the time and effort put into activity indicate intention to make a profit?
- Do you depend on income from the activity?
- If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
- Have you changed methods of operation to improve profitability?
- Do you 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?
- Do you expect to make a profit in the future from the appreciation of assets used in the activity?
Note: The IRS looks at your profit motive at the time you start your business TO DETERMINE IF BUSINESS OR HOBBY. For this reason, it’s important to have a well put together business plan with projections of overall business profit.