Does The IRS Consider Your Home Business A Hobby?
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:
1. Did the taxpayer get advice? Seeking out the advice and expertise of others may be a sign of profit motive. This is one more benefit of a Leaders Club subscription!
2. In what manner does the taxpayer conduct business? This might include keeping good records, perhaps a separate checking account, but the definition of "manner" is vague at best.
3. How much time and effort does the taxpayer spend on the activity? The IRS may look more closely at distributors who work the business part-time. This is were the Leaders Club activity tracking worksheets can have an additional value.
4. Is the business being run like similar profitable businesses? Advertising your business, getting leads, and using promotional materials are all evidence of a profit motive. Again, something a simple Leaders Club subscription can provide.
5. Has the taxpayer had prior home business success? If you’re new to the business, the IRS may consider your profit motive questionable. Evidence of serious study and purchase of additional training, seminars, courses or coaching (all available through Leaders Club) can compensate for that.
6. What is the taxpayer’s history of income or losses in the business? A distributor whose expenses greatly exceed income may find it challenging to show a profit motive.
7. What is the taxpayer’s financial status? The more income you earn through other sources, the less likely it is that the IRS will recognize your business losses.
8. Is the taxpayer in it for pleasure? If a taxpayer takes significant personal pleasure in the activity it is more easily perceived as a hobby.
As a businessperson you have a large number of possible deductions available to you that are not available to those who do not have a business.
Leaders Club recommends a little common sense when figuring what expenses should or should not be deducted and always seek the advice of a Certified Public Accountant or
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