Thursday, October 22, 2009

Hobby or a business? An IRS view.

Yesterday I wrote about several possible small business opportunities, many easily done and with little to no startup cost. One of these involved turning a hobby into a money-maker. Naturally, of course, there are potential tax implications from such a move. If one intends to mix business and pleasure, be aware of the IRS rules and regulations. The following are taken directly from the IRS small business site:

"In order to make this determination (hobby vs business), taxpayers should consider the following factors:

  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Does the taxpayer depend on income from the activity?
  • If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
  • Has the taxpayer changed methods of operation to improve profitability?
  • Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
  • Has the taxpayer made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years,including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses."

The entire IRS opinion is here:,,id=169490,00.html

Remember, always do your homework and don't cause trouble with the powers-that-be!

- AJ

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