Your hobby a business?

Have you turned a hobby into a business?  Did your tax preparer warn you that you must show a profit at least three out of five years to be considered by IRS to be a business? 

A common situation.

SCORE counselors frequently get questions from clients about this issue.  During this past week, I helped a client through the maze of rules about whether for 2007 she should report her income and expenses on her tax return as a business or as a hobby. 
She had a loss on this activity for 2007.  If it is a business, she can use that loss to reduce her other income and thereby reduce her income taxes.  Hobby losses cannot be used to offset other income.

Dealing with the IRS - are you a business ?

In the instant situation, my client had gone from working full time to working only part time so she would have time to pursue this activity.  In addition, she purchased a couple thousand dollars worth of equipment for this sideline activity.  She called the IRS and they told her it was a hobby and therefore not deductible.  Was this assessment accurate or can a case be made that it is a start-up business and deductible?

Many businesses experience losses in the start-up phase of operation.  Usually, your activity is considered a business if you have a reasonable expectation of earning a profit and if you run the activity in a businesslike manner. 

Other questions for which a "yes" answer indicates your activity may be a business rather than a hobby are:  Does the time and effort you put into the activity indicate an intention to make a profit?  Do you depend on income from the activity?  Do you or your advisors have the knowledge needed to carry on the activity as a successful business?

Getting FREE guidance:

Do you need advice on how to turn your hobby into a profitable business?  Do you want to learn more about the IRS rules for business income and deductions?  SCORE wants to be your business advisor.  Call SCORE today and make an appointment to visit with a counselor.

Jean Kruse,
SCORE Chairperson