Many Americans run home businesses that are not their primary source of income. However, not all home businesses claimed on tax forms are actually run to earn money. Writing off space, materials, and other investments in an unprofitable home business has been used in the past to offset the tax burden of one’s primary income. The IRS has released a statement that they are cracking down on hobby tax cheats and detailed how they plan to catch them.
Home Business Vs Hobby
One of the main problems is that many home businesses require a great deal of time to become solvent in this economic environment. It can be especially difficult to determine the fine line from the IRS’s perspective. In general, however, there are a few guidelines. A business that has been in the black for three of the prior five years is easy to defend as a profitable activity rather than a hobby.
However, all is not lost for businesses that are less profitable than this standard. If you have invested a great deal of time in your small business, kept records and otherwise treated it as a future profitable venture, and been successful in similar ventures, the IRS is likely to give you a break under the ‘facts and circumstances test’. In addition, you are less likely to be viewed as a hobbyist by the IRS if the activity is not one you generally do for personal enjoyment.
Why Crack Down on Hobby Tax Cheats?
Claiming hobbies as a business has unfortunately become too great of a problem for the IRS to ignore. It has been estimated that more than one million people are falsely claiming write-offs for hobbies, totaling $70.9 million dollars in revenue losses. This number has been growing steadily.
If your small business is in the gray area between a hobby and a profitable venture, it is important to keep good records and have proof that you treat it as a business. In addition, equipment and activities that are written off should not be used in recreation. If you separate your hobbies and businesses as much as possible, there is a good chance that the IRS will also see the difference.
