Many people think they can write off expenses related to a small business regardless of their profit from this business. However, the IRS has stringent hobby or business rules that determine whether expenses can be written off. Staying on the right side of these regulations will help to ensure you won’t be audited.
What Makes a Business?
You might have a passion for your business, but the IRS might not share it. The IRS cares more about profit potential. Many non-tax professionals give advice about hobby or business rules for the IRS but they don’t file your taxes. You might think you have a business s- but does the IRS agree?
There are a few things that make a venture a business in the eyes of the IRS. Is your time spent trying to make a living? If you approach your business as a hobby, then don’t expect to make the government see otherwise. This is where things get foggy. There are a lot of rules, but so many are up to interpretation.
Details That Matter
When trying to turn a hobby into a business, details matter. After all, some of the largest corporations file a loss every year without anyone suggesting they are a hobby, Recordkeeping is the first and perhaps most important detail. If your hobby is becoming a business then you should track all earnings and expenditures like a business. Even start up costs can be written off if you are treating your venture like a business from the very beginning.
You also can’t continue to claim expenses for a business when it fails to make a profit year after year. Not only is this a waste of government dollars, it is a waste of your own resources. If you plan to claim a loss, make sure you can show reasonable hope of profit in the future. If you don’t care about losses, reconsider whether this is truly a hobby.
Hobby or Business?
Because this is a gray area in tax law, it is important to consult a tax professional. A tax professional can let you know whether you have a hobby or a business, and help you to file accordingly. Even if you think you have a business, there are caveats. You must track and report all income, and itemize all deductions. In addition, you can only write off a percentage of your loss.
Many people assume that they can call any hobby a business as long as it brings in some income and an occasional profit. However, the IRS knows that businesses should be profitable. Staying on the right side of this line is essential to avoiding future inconveniences.
Gary Kaplan is a CPA with more than 18 years of experience assisting individuals and businesses with virtually all aspects of their tax and accounting needs. Taxpayers in Florida, Maryland, Washington, D.C., Utah, and New York are encouraged to call Mr. Kaplan to learn more about what the new threshold may mean for their business.
