Let’s clear up this IRS rule about hobby profits and losses

March 6th, 2014 → 8:14 am @ // No Comments

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I read this misinformation on an unnamed blog recently:

To prove that your blog or any business is a legitimate business then you must make a profit 3 out of 5 years that you are in business.

That’s a common misunderstanding of the IRS rules.
What the IRS states is this:

“An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year.”

Source: http://www.irs.gov/uac/Is-Your-Hobby-a-For-Profit-Endeavor%3F.

The IRS is saying if you make a profit, you’re a business.

But logic rules tell us that the converse of a statement is not necessarily true.

The IRS is NOT saying you must show a profit or else you’ll be considered a hobby. They are stating that if you do show a profit, you will be considered a business, which is what you want. You want to be considered a business because being considered a hobby is very detrimental tax-wise.

A business can lose money every year and still be a legitimate business. Of course, the IRS and you may wonder if it is worthwhile to continue in a business that loses money every year, but it can happen.

Here’s a brief video clip explaining this hobby rule: http://taxesforwriters.com/video-blog-will-losses-mean-writing-is-a-hobby/

I hope that helps clarify a common misunderstanding.

 

Carol Topp, CPA


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