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Independent contractor

How long can you safely claim a business that really isn’t making a profit before IRS call it a “hobby”. 2nd if I no longer want to claim a business and the deductible expenses, what will I need to do to so Turbo Tax won’t ask for that information next year? 

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2 Replies

Independent contractor

The general rule is that you should make a profit in three of every five years on a rolling basis (two of seven years for activities involving horse racing, breeding, or showing). Otherwise, IRS can disallow losses.

Earning side income: Is it a hobby or a business?

 

If you close your business, you can delete it in TurboTax.

  • If you were in business for part of 2022 you can have to report part-year income and expense.
  • If you are depreciating assets, you will have to close them out by either showing they were sold, disposed of or transferred to personal use. This may produce taxable income or loss.

See Closing a Business

STaxLady
Employee Tax Expert

Independent contractor

Hello @dejvu89 , thanks for the question. I'm happy to assist with this!

 

First off, let me say that there is not a specific timeframe where a person can "safely" claim something as a business if it is, in fact, a hobby. The IRS uses several factors to determine if something is to be considered a business (with the intent for profit) or if it is a hobby (which may or may not result in profit).

 

Conversely, if a business does show a profit in at least three of five consecutive years, the IRS will consider that it is engaged in with a profit motive. 

 

It is important to get this right! Let me provide you with some links to more information on the topic:

From TurboTax:

https://turbotax.intuit.com/tax-tips/small-business-taxes/when-the-irs-classifies-your-business-as-a... 

From the IRS:

https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business 

 

In general, if there are no underlying assets that need to be dealt with, the self-employment item can be deleted when preparing the tax return. It is important though, to consider whether there is any depreciation to recapture, or whether any business property was sold or otherwise disposed of. It would be advisable to reach out for assistance before actually deleting the item in TurboTax. We have credentialed tax experts available to help with this, year round.

 

I hope that I have answered your question, dejvu89! Please, reach out if you need additional information.

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