"oynk" <jwestpha[at]adelphia.net> wrote:

- quote -

You generally want to avoid the "hobby loss" rules if at all
possible. The best way to do that is to run your business in
a business-like way. Many businesses operate at a loss for
quite a few years, but as long as you have the expectation
of a profit some day and are seeking customers, you have
probably met the burden of proof that it is a business and
not a hobby.

--
Tom Healy, CPA
Boulder, CO
Web: http://www.tomhealycpa.com

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- quote -

Thanks to everyone. I eventually filed the schedule C and
did the paperwork. <yuck
I still find this confusing, though. What I seem to be
hearing is that I'm dammed if I do, and dammed if I don't.
What I can see happening is that I go along for the next
several years and end up with a loss of about $400-500 a
year. The IRS gets all huffy and says that it's not a
business, it's a hobby, and I'm not entitled to deduct the
losses.

Fine, so I call it a hobby, and for the next few years I
show a hobby "profit" of $600-700 a year. Now, I'm in
trouble for not filing as a business and paying SE tax?!

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oynk wrote:

- quote -

In my opinion there is no such thing as a "hobby profit." If
the activity is profitable and is engaged in on a "regular
and continuous basis," it IS a "business" for tax purposes,
regardless of how casual or sloppy your approach may be.
Note that the so-call "hobby loss" rules are just that: a
limitation on the deduction of LOSSES. I don't see any grace
allowed in the case of gains.

That said, I suppose it might be possible to have an
OCCASIONAL hobby gain without incurring SE tax liability. An
example might be an amateur athlete who normally incurred
losses (non-deductible), but then on a one-shot basis won a
prize of significant value. That MIGHT work. But, the second
time you won a substantial prize, you have begun to slide
down the slippery slope.

MTW

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"oynk" wrote:

- quote -

The way you've described it, you're taking on enough work to
keep busy and have some fun. That does not satisfy the
section 183 rules about conducting the activity like a
business. But since auto and home office throw it into a
loss, you still have positive cash flow, but that's
irrelevant to section 183.

So...rather than lose anything to the 2% floor, file a Sch
C. The home office cannot reduce net income below zero, so
don't claim a home office, which may not be regular enough
use to qualify anyway. Then, if necessary, reduce your auto
mileage at the standard rate to that which you can
absolutely prove beyond a shadow of doubt. ;-) Is the loss
now about $40, or a profit of $30?

Fred F.

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An interesting question. You probably can keep it a hobby,
but you'll have to make sure that you play down the
profit-making aspect and play up the personal enjoyment
aspect. One reason why the IRS might try to turn it into a
trade or business is so that you become liable for
self-employment tax.

You would do well to do a little research on what fact-sets
the IRS particularly likes when it argues that something is
a hobby rather than a business, identify the facts that
weigh best in favor of that decision, and construct your
routine accordingly.

Sloppy books may be a factor, but they're not determinative,
and if the IRS otherwise decides that you have a business,
it will use a proxy method to reconstruct your income (like
the bank account method - everything going into the account
is presumed income unless you can show otherwise) and will
not grant you deductions unless you can prove those. You
could end up paying tax on more income than you actually
had.

It's a difficult line to stay on the desired side of, but
with some decent research you should be able to achieve the
desired result. Talking to a cpa/tax attorney would help.

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I've recently decided to become a stay-at-home mom. In the
process, I've been looking at ways to bring in a little
extra money, and I've started doing a variety of little jobs
on the side. In terms of the real world, I'm having fun,
traveling around, and bringing in a much needed few extra
hundred dollars a month. In terms of the way the IRS looks
at things, once I deduct all the expenses I'm entitled to,
I'm operating at a loss. If I claim actual vehicle
expenses and depreciation (instead of the standard rate) and
business use of my home, it's actually a decent loss (a few
thousand, anyway). (I feel like I have a pretty thorough
understanding of these provisions, so that's not the issue).

I understand that most people *want* to be able to show that
their hobby is really a business so they can take the
deduction associated with the loss. Right now, I'm just
weighing all my options. The truth of the matter is, I think
that I'd just as soon just break even and not hassle with
all the extra paperwork and the threat of an audit over my
head. I've searched and searched, and I can't find anything
that says if I'm *requried* to prove that what I'm doing is
just a hobby and not a business. (I doubt I'd ever get to
the point where I'd owe self-employment tax).

If I meet that standard that the IRS sets forth, do I *have*
to call it a business? (And, if I keep sloppier records and
act less professionally, then does that negate the "proof"
of a profit motive).

Also, it looks like depreciation is deductible (up to the 2%
limit, etc.) for a hobby, based on the three tiers under
rules for Activities Not For Profit). If I decide that I
want to claim the depreciation do I just fill out the form
and then claim the amount under misc. deductions on schedule
A?

Thanks,

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