Hobby or real business? Factors that the IRS looks to

It seems so easy. Just start a business and start taking those lovely business deductions. Right? Wrong. While starting a business in Indiana is quite easy, all things considered, you still have to meet certain goal markers to demonstrate that you are in fact running a business endeavor and not running a hobby business.

Hobby businesses are businesses run for the pleasure of running them. They do not qualify for the same tax breaks as a regular business endeavor, and the IRS will have no problems asking you to please pay them back with penalties if they find that you are not running a business.

Bearing this in mind, it is important to understand the factors by which the IRS determines whether you are running a real business or not. No one factor is dispositive, but do remember that if there is a dispute as to whose favor it should be settled in that the IRS will settle it in its favor.

The Factors

The primary factors which the IRS will look to are:

1. The way you carry out this business and whether it is professional or casual.
2. The expertise you have in this business, both in formal education and learning hands on.
3. The appreciation or depreciation in value of business assets and your expectations.
4. The level of success you have had in the past with such activities and whether you have a recorded history of profits and losses.
5. The level of profit you have earned in contrast to the time you have been doing this.
6. The business's financial status.
7. The amount of enjoyment you get from this activity.

Making It A Little Easier

To help protect yourself, make sure that you document your reasons for viewing your business as an actual business. Keep good records and save relevant material so that you can show it if need be. This would include relevant receipts, leases, contracts, meeting minutes, pertinent memos, and the like.

Also, remember to be precise in your tax reports and in the deductions taken. It may be wise to keep a virtual copy of all these records so that you save room since this can add up into a lot of paperwork.