Business or Hobby?
It’s All About Taxes
The difference between a money-losing business and a hobby matters at tax time. This week, Craig Siminski, of CMS Retirement Income Planning, shares an article that presents IRS criteria for making the distinction:
Many successful businesses began in garages or around kitchen tables. And many businesses lose money in their early years. However, some ventures that begin with business aspirations never make money and turn into expensive hobbies.
The difference between a money-losing business and a hobby is important at tax time, because you may be able to deduct business losses from other income to help reduce your tax burden. But you cannot deduct hobby expenses.
Working for Profit
In order to qualify as a business, the activity must be operated with the intention and potential to earn a profit, even if it is not profitable every year. For any given tax year, the IRS will presume that your activity is operated for profit if it has earned a profit in three of the previous five years, including the current year. If you are just starting your business, you can file Form 5213 and request that the determination be delayed until you have five years of business experience.
If your activity does not pass the three-year profitability test, the IRS will take into account all facts and circumstances regarding the activity in order to determine whether you can deduct business losses from other income. These are some questions you should consider …
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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 21 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.
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