The IRS says your business activity needs to make a profit 3 out of 5 years otherwise they could audit and possibly treat the business as a hobby EVERY YEAR you have filed.
A) Is profit or loss the ONLY thing they look at? What about having good records for schedule C on Part I income and Part II expenses, a state business license, and the time spent on this business?
B) EVERY YEAR could be treated as a hobby; including years that had a profit?
C) If prior years are treated as a hobby, what is disallowed; ALL income, and ALL expenses or only some of these are disallowed?
D) Once they say the business is a hobby can it be changed back to a business later on?
E) How / where will my ‘hobby’ income and expenses be reported in future years?
F) What Turbo Tax Product would be best to use?
Thanks for your help.
A) Is profit or loss the ONLY thing they look at? What about having good records for schedule C on Part I income and Part II expenses, a state business license, and the time spent on this business?
there is reg 1.183-2(b) which contains factors the IRS would look at
https://www.law.cornell.edu/cfr/text/26/1.183-2
strategy
keep thorough and businesslike books
use a separate bank account for the business
keep good records as to personal and business use of assets such as equipment, vehicles, etc
research market/technology trends in similar businesses
obtain insurance, registrations, certifications, licenses, etc. that are need for the business
document periodic evaluations of operations to attempt to improve profitability
develop a written business plan and update it annually
B) EVERY YEAR could be treated as a hobby; including years that had a profit?
yes
C) If prior years are treated as a hobby, what is disallowed; ALL income, and ALL expenses or only some of these are disallowed?
Activity not for profit. You must include on your return income from an activity from which you don't expect to make a profit. Enter this income on Schedule 1 (Form 1040), line 8. Deductions for expenses related to the
activity is limited to $0 for 2018-2025.
D) Once they say the business is a hobby can it be changed back to a business later on?
yes you can but you bear the burden of proof and that would likely start with the first year you again treat it as a business. if you can't convince the IRS operations are now not a hobby you risk substantial penalties.
E) How / where will my ‘hobby’ income and expenses be reported in future years?
see C)
F) What Turbo Tax Product would be best to use?
you can't use the free version. it does not provide for schedule C (you treat it s a business) or schedule 1 (you treat it as a hobby)
the upside to a hobby is no there is no Self-employment tax on the income.
another thing. not a hobby - in some cases the operations are continually unprofitable, however, the value of the assets including goodwill are increasing so if the business were sold there would be an overall profit.