You Can't Deduct that Loss
How to ensure your business is not deemed a hobby
You’ve loved dogs all your life so you decide to breed them and start a dog training business. Is this a business in the eyes of the IRS or a hobby? Knowing what the IRS is looking for and properly positioning your small business can save taxes and headaches if you are ever questioned by the IRS.
Why you should care
If your activity is a business, your income can be reduced by all your qualified business expenses even if it results in a loss. If your activity is deemed a hobby, no losses are allowed on your tax return, and even worse, after 2018 you cannot deduct expenses against this revenue. So you're telling me if I knit three sweaters and sell them for $1,000 I cannot deduct the cost of the wool if it is a hobby? Technically, yes! Which is why you need to change how you think about these kinds of activities.
Tips to make it a clear business
Here are some tips to ensure full deductibility of your expenses against your business income.
Wondering if your business activity may be considered a hobby? Review this checklist. The more yes answers, the better your chances of defending your position.
Remember, having a business activity reclassified as a hobby can mean a big tax bite at tax time. But by keeping proper records and pro-actively knowing the pitfalls, you can avoid most problems.
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The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
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Mia Verc, CPA; Janice Papais, CPA
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