Is Your Business Really Just a Hobby?

AMOA Financial Helps You Verify If Your Business Is Really Just a Hobby

This is a very important question to ask. As a operating a business, especially from your home, often equals excellent tax deductions (from rent to utilities and internet). But you don't want to get caught deducting the cost of your favorite hobby because this could result in stress and money owed. So what questions should you ask to be sure? Here's a list to consider from the always helpful IRS.gov:

  • 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?

I'm often asked the question, "I don't have to make a profit right?" Well operating at a loss in your business certainly has it's tax benefits. (Although cash for business operations and future credit-options may suffer.) Yet the IRS does expect you to generate a profit at least three of the last five tax years, including the current tax year.

If your business is not able to generate a profit three out of five consecutive tax years it may peak the IRS' interest. There is a chance the IRS may request information to ensure you are not abusing a business entity, solely to receive a tax benefit. As they state over $30 billion dollars in hobby expenses are incorrectly recorded as business tax deductions each year. 

That being said, if you are an AMOA Financial client there is no question whether or not you are seeking to generate a profit. So go be creative. Let us handle the paperwork.