Is Your Business a Hobby? pt. 5
E.) The success of the taxpayer in carrying on other similar or dissimilar activities
So you own a doggie daycare–does that really qualify you to run a dog training business? This is an example of what the IRS might ask when it comes to similar ventures. Keep in mind that you might be able to make a really strong case that two seemingly unrelated businesses are related and that your success in one shows that you have the knowledge and skill to carry on the other in a successful manner. If you’ve been a successful IT network technician then you may be able to say that you would make a great PC hardware technician and that you could make a go of it.
F.) The taxpayer’s history of income or losses with respect to the activity
The one thing that stands out in my memory of audits with this is a guy I worked with who was a horse breeder. When he had profits, they were spectacular, when he had losses…well, I would have cried. A LOT. They seemed to balance out pretty nicely–you could easily argue to the IRS that the losses and gains balanced out to a net gain–which was a point in his favor during the audit. However, there is a three-in-five rule (with exceptions for horse breeding) where you can only have a loss three out of five years that the business is in operation. Any more than that–there is a chance of audit because it looks like the activity wouldn’t actually be a business but is a hobby that’s not pursued for profit.