If IRS decides your business is a hobby, does that mean an audit and/or a penalty?
Or do they just send you a letter disallowing your Schedule C business deductions, without penalty and without audit?
You'll need to sign in or create an account to connect with an expert.
See https://www.irs.gov/newsroom/know-the-difference-between-a-hobby-and-a-business
You might not be penalized but you might owe additional tax which would entail interest on the past due amount.
Thanks Champ. My estimated tax payment is large enough to cover the tax if my deductions are disallowed. I am more concerned with the audit and penalty. Are these likely and is the penalty large? My business is very small and in a foreign country. And if I decide the risk of penalty is not worth it, and decide not to take the deductions, what do I do? Do I just not file a Schedule C at all? Or list the loss in Schedule C but then don’t take the loss on Schedule 1 (Form 1040), line 3, and on Schedule SE, line 2? Thanks again.
You need to decide whether this is a business or a hobby based upon the following factors:
See Earning side income: Is it a hobby or a business? | Internal Revenue Service (irs.gov)
Also, I don’t see anything on the link you provided that talks about the 3 out of 5 year rule (it’s a business if you show a profit in 3 out of 5 years) I thought that was the main rule. Anyway, my business was dormant in its first 2 years with 2 dormant 8858s filed; 2023 was the third year of the business and first year the business became active, but still no profits, just expenses. If I explain this in an attachment, do you think it makes a difference?
My main concern is that if there’s any chance of penalties, it’s not worth it to me to try to take the loss.
Penalties should not be a concern unless your position is completely unreasonable.
@Regsa wrote:
.......it’s a business if you show a profit in 3 out of 5 years) I thought that was the main rule.
That is the presumption, and it is rebuttable.
Note that there is no inverse presumption (i.e. there is no presumption that the activity is a hobby if you show a loss in 3 out of the last 5 years).
It’s definitely a business, it’s just been slow getting started. It’s registered as a business in both the country where it is located and in the US. It has an EIN number. It just hasn’t made a profit yet, but I intend it to make profits in the next year.
Still have questions?
Make a postAsk questions and learn more about your taxes and finances.
kay4G
Level 1
DARROW
Returning Member
Regsa
Returning Member
NSiw2874
Level 1
jclapp
Level 1
Did the information on this page answer your question?
You have clicked a link to a site outside of the TurboTax Community. By clicking "Continue", you will leave the Community and be taken to that site instead.