| IRS usually allows 5 years of business activity | | | | 7. Does your activity make a profit in some |
| before they question if your activity is a business | | | | years? |
| or a hobby. You must show a profit during at | | | | 8. Can expect to make a profit in the future |
| least three of the last five years, including the | | | | from the appreciation of assets used in your |
| current year. There are exceptions to the basic | | | | activity? |
| rules. | | | | If you answer "yes" to the above questions, then |
| If your business activity does not show a profit | | | | you more then likely have a valid business and not |
| then, it is considered; not for profit and the losses | | | | a hobby. If you are not sure, you should contact |
| from your activity may not be used to offset | | | | your tax professional. Each of these points have |
| your income. | | | | additional legal jargon attached to them, for legal |
| In order to make this determination if your | | | | tax codes, go to: irs.gov and read Publication 535, |
| activity is a hobby or a business, ask yourself the | | | | Business Expenses. |
| following questions: | | | | If you have a valid business, you report your |
| 1. Is the time and effort you put into the activity | | | | income on Schedule C. If you have a hobby, you |
| indicate your intention to make a profit? | | | | report your activities on Schedule A, with |
| 2. Do depend upon the income from the activity? | | | | limitations. |
| 3. If there are losses, are they due to | | | | There are companies out there selling home |
| circumstances beyond your control or did they | | | | business as a legal tax deduction. Before you |
| occur in the start-up phase of the business? | | | | make such an investment, remember question |
| 4. Have you changed methods of operation to | | | | number five. Are you qualified to run/operate the |
| improve profitability? | | | | activity or do you have advisors who have the |
| 5. Are you qualified to run/operate the activity, or | | | | knowledge needed to carry on the activity as a |
| do you have advisors who have the knowledge | | | | successful business? |
| needed to carry on the activity as a successful | | | | Again, IRS presumes that an activity is carried on |
| business? | | | | for profit if it makes a profit during at least three |
| 6. Have you made a profit in similar activities in | | | | of the last five tax years, including the current |
| the past? | | | | year. |