HOBBY OR BUSINESS ?

If you have a lifetime hobby that has business potential, why not turn it into a business venture? For the undertaking to be treated as a business, you must have a profit motive. But the government recognizes that you may not make a profit immediately, and will automatically treat the venture as a business, if you make a profit in three out of 5 years. This enables you to take all of your business expenses as deductions over the 5-year period and offset losses against other income reported on your tax return. Should you fail to meet the 5-year test, the IRS would consider the venture a hobby and limit your deductions to the income the hobby generates. Furthermore, the expenses would be treated as miscellaneous expenses and could only be deducted to the extent the miscellaneous expenses exceed 2% of your adjusted gross income. At any rate, you can request the IRS to delay up to 5 years in making the decision of whether your business is conducted in for profit or is merely a hobby. Even if a business fails the 5 year profit test, you may be deemed to have had a legitimate business motive if you:

• Maintain complete accounting records as well as other supporting documents.
• Conduct the business in a professional manner (attempt to generate business and control costs).
• Devote significant time to the venture
• Depend on the income from the venture for your livelihood.
• Show that your losses were incurred as a result of circumstances beyond your control.
• Modified your operations to prevent recurrence of losses.
• Show that you and your professional advisors had the experience and expertise to run the business successfully.
• Explain that you have a reasonable plan for generating profits from the venture.

Even if you do not succeed in convincing the IRS of your legitimate business motives, hopefully the worst thing that will happen is that you’ll need to pay added taxes and interest.

ABO AND COMPANY helps many people turn a hobby into an enjoyable profit-making activity.