The IRS can call your money-losing business a hobby – and take away your deductions!

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 you expect to make a profit in the future from the appreciation of assets used in the activity?

The IRS wants to prevent a savvy taxpayer from characterizing a hobby – such as stamp-collecting or dog-breeding – as a money-losing business.

For more information: http://www.irs.gov/newsroom/article/0,,id=169490,00.html

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