Summer Tax Free Hobby or Business?

If you have a small business and you want to deduct your expenses, the rules say you must be able to show that you are engaged in a trade or business for profit.

But that doesn’t mean your business has to be profitable every year. If you can show that you are trying to make a profit, and can prove it, you can deduct your expenses even if they exceed your business income.

If on the other hand, it is determined that your so-called business is really a hobby, you will be able to deduct expenses only to the extent that you have income from your hobby.

How can you prove that your business is really a business? One way is to make a profit in two out of five consecutive years.

But even if your business loses money each year, all is not lost, You can deduct your losses if you can prove that your intention was to make a profit, even though you failed to do so.

Tax Court

The Tax Court has found in favor of a taxpayer where the taxpayer had significant expertise in business, approached the activity in a businesslike manner, maintained adequate books and records, advertised the business, and changed the method of operation to increase profitability.

Tax Tip

The more business-like your operation, the better you are poised to make a profit. In conclusion, even if you don’t, the more likely you are to be able to deduct your losses.

Good business practice(s) make good business sense, and good business sense translates into adding generous profits and cents (no pun intended) to your bottom line.

This Journalist holds an M.B.A. degree in Taxation and is Licensed to Practice before the I.R.S. For Church Seminars: Call 212-560-7177. Email: dnrmba@aol.com