In an article published in TAXES magazine, Bruce J. Squillante, Senior Tax Attorney at Amway Corporation, addresses the so-called “hobby-loss rules,” and how it applies to network marketers.
What exactly does the term “hobby-loss” mean? In the most basic terms, distributors must run their network marketing home businesses with the intention to make a profit in order to legally deduct losses from their business against other income. The problem is that the definition of “for profit” is not as simple as you’d think. Existing laws require that in order to qualify for business deductions, every business, almost without exception, must show a profit in at least three out of five consecutive years. If you don’t, then the IRS can seek to prove that you are really only engaged in a hobby without profit motive. That means no deductions.
The law provides a “presumption” to taxpayers that their activities are engaged in for profit if certain condition are met. However, as the article points out, “There is no single dispositive factor. A determination of profit motive is not made by comparing the number of factors showing a profit motive to those showing a lack of profit motive.” Below is a brief summary of the relevant factors:
Full Article: Does The IRS Consider Your Home Business A Hobby?