The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby, an activity not engaged in for profit.
In order to make this determination, 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.
Photo by IRS.