It could lead to an audit. In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income. The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year. They also consider that a business start up may take some time to become profitable. You are not the first or last where profitability takes longer than expected. You must decide whether this is a hobby or a business and the following will help you.
Trade or business activities and activities engaged in for the production of income are activities engaged in for profit. The following factors, although not all inclusive, may help you to determine whether your activity is an activity engaged in for profit or a hobby:
• Does the time and effort put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Do you expect to make a profit in the future from the appreciation of assets used in the activity?
Hobby Key elements:
- A hobby requires you to report the income you received and under the current tax law, Tax Cuts and Jobs Act (TCJA), no expenses are allowed to be used to reduce the money collected even if you itemize deductions
- Business or Hobby
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