IRS DANGER – BUSINESS OR HOBBY
Be Very Careful – Could Be Costly
This is something often overlooked by novice startup business owners.
Overlooking this can bring a nasty suprise from the IRS even some years after you have your business in operation.
It pays to do the research and business planning before launching your new business.
The article reposted below is from one of our business websites: SmallBizKickstarter.com
BUSINESS OR HOBBY IRS VIEW
Make Sure Your Business Is Not Viewed As Hobby By IRS
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Working From Home
Home Business – Beware !!!
With the number of new start-ups and home businesses being formed today, it is vitally important to be aware of a real potential problem. If you are operating a home business, internet online marketing, or MLM, you are a prime target.
Let’s say you start a business – run it for 4 years all the while deducting your expenses as a loss against your income. Then in year 5 the IRS audits your business and disallows all your tax deductions back to start of business on the basis of IRS Regulation Section 1.183-2. This could be a very nasty surprise, and devastate your small business.
Set Up Your Business Properly From Beginning
It would be wise to set up and run your business from the beginning in a manner that will protect you from the unhappy scenario outlined above. Be advised, the IRS is very active in pursuing this examination of small business under IRS Regulation Section 1.183-2. If the IRS determines that you are not engaged in activities to make a profit, then no deduction for losses is allowed.
Safe Harbor For Your Business
There is a “safe harbor” for the presumption that your business is being operated as a business for profit. If your activity shows a profit for any three or more years in a period of five consecutive tax years, you are presumed to be engaged in a business.
See Internal Revenue Code Section 183 (hobby loss rule)
The following is a list of IRS factors considered:
- Does the time and effort put into activity indicate the 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?
Note: The IRS looks at your profit motive at the time you start your business. For this reason, it’s important to have a well put together business plan with projections of overall business profit.
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