Carrie C. Susz, EA

C.) The time and effort expended by the taxpayer in carrying on the activity

Oh the stories I can tell you about this one!  The biggest culprits? Gamblers, sadly.  Numerous Tax Court cases involve folks who don’t pursue their business as if it were a job time-wise.  How many cases talk about the person who just made a little money on a hobby and decided to take a business loss because they picked up all their expenses (thus violating hobby rules.)  Again, this falls into the first topic–that the business should be carried on as a business and not as if it’s a hobby.  You put time into the business as if you want it to succeed and be profitable.

D.) Expectation that assets used in the activity may appreciate in value

Back to the auto restoration business as an example–you have to expect that the vehicles you’re working on will be worth more money when you’re done than when you start with them.  (Considering the condition of most restoration candidates, that shouldn’t be difficult!)  The assets, items belonging to the business, produced by the business, or used by the business might increase in value with the continued use or development.  You’ll notice that this one line states that the assets “may appreciate” this one in particular is meant to be a guideline, not an absolute.  There are plenty of businesses out there where all the assets lose value because they’re consumed in the processes that businesses employ to make money (using a sewing machine to assemble designer handbags doesn’t make the sewing machine more valuable, for example.)  This is one of the guidelines and if your business’s assets don’t increase in value but you meet all the other criteria, you’re probably fine.