So How Does the IRS Determine a Business?
The IRS has come up with a list of factors that could be used to determine whether your pastime is more business than hobby. No one factor is decisive. The IRS says all facts and circumstances are taken into account. Here are the most common factors that should be considered:
- Do you carry on the activity in a businesslike manner?
- Do the time and effort you put into the activity indicate that you intend to make it profitable?
- Do you depend on the income from the activity for your livelihood?
- Are your losses due to circumstances beyond your control, or are they normal in the startup phase of your type of business?
- Do you change your methods of operation in an attempt to improve profitability?
- Do you, or your advisors, have the knowledge needed to carry on the activity as a successful business?
- Were you successful in making a profit in similar activities in the past?
- Does the activity make a profit in some years? If so, how much?
- Can you expect to make a future profit from the appreciation of the assets used in the activity?
The IRS assumes that an activity is for-profit if it makes a profit in at least three of the last five tax years, including the current year. (If you're breeding, showing, training or racing horses, that range is two of the last seven years.)
Business income and expenses should be reported on Schedule C, Profit and Loss from Business.
To speed up the time it takes to prepare your income tax, print and fill out the form below and bring it when you come in.