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Business or Hobby IRS View


Tips for Small Business Owners


Business or Hobby IRS View
Business or Hobby IRS View 

Business or Hobby IRS View


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.

See Online Business or Hobby

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.

  See Internal Revenue Code Section 183 (hobby loss rule)

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?
Business or Hobby?
Business or Hobby IRS View

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.

See Small Business KickStarter

      Business or Hobby IRS View