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.
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.
A.) Manner in which the taxpayer carries on the activity
Are you acting like this is a job? Do you try to analyze the current business situation and improve it from period to period? This shows that you’re running the business as a business–there is an intent to make a profit. Essentially, a business is defined as a venture that is taken on for profit. I have to admit–if you have been “in business” to lose money–the IRS (or any other taxing authority) will not view it as a business.
B.) The expertise of the taxpayer of his or her advisers
Are you a dog-lover? Do you really love old cars? How about starting a business working on old cars or starting a dog-training facility? Unfortunately, unless you have advisers helping you out or know about dogs or cars respectively, then there’s going to be a problem if you go into dog training or auto restoration. What you need to do is find someone who can help you determine what the best actions are to make your business profitable. Those advisers give credibility to the business that you might be lacking at first.
As I promised in “Do you have to suffer for your business?” and again in “Is your Business a Hobby? pt. 1” I’m going to explain what constitutes a business, based on the 9 tests that the IRS and the Tax Court has laid out to determine if a business is really a business.
A.) Manner in which the taxpayer carries on the activity
B.) The expertise of the taxpayer of his or her advisors continue reading this article »
So here I’ve been studying for the CPA exam. I was assured that I don’t want to over-study, especially since I took 3 sections within three weeks of each other. My scores? (Keep in mind that a 75 is passing.) BEC: 76
AUD: 74
FAR: 72
So close! This is really frustrating since I got a 74 the last time around on BEC. (I know, TWO 74s!) I passed the tax section, REG, over a year ago with no studying. What does this tell me? The obvious–I should stick with what I like and focus on taxes!
IRS released guidelines to help taxpayers determine if their businesses were, in fact, hobbies. Why does this make a difference? Well, you can’t deduct the expenses for a hobby beyond the amount that you earned from the hobby. It’s incentive to make your hobbies break even. Here’s a link on how to determine for yourself if your business is a hobby. We’ll see Tax Court’s input tomorrow. (For that matter…the next few days.)
In the last few weeks I’ve participated in the Susan G. Komen Breast Cancer 3-day walk and attended the IRS Tax Forum in Las Vegas. Sorry blogging has been light–I hope to rectify the situation soon.
I came across this site. I love the recently released CPA exam questions. Those are pretty neat–and remember, no where does it say those questions are retired–study them because you never know!
I’ll admit, I took this section before. I needed a 75 to pass and got a 74. What a bummer! Darn that Financial Management–it was the only component that I missed getting a passing score on. Here’s how BEC (Business Enviornments and Concepts) breaks down:
Business Structures: 17-23%
Financial Management: 17-23%
Information Technology: 22-28%
Planning and Measurement: 22-28%
Economics: 8-12%
I did really well in the IT component of the exam, which proves that I actually listen to my husband when he discusses his work. I took this a week ago, and unlike the last time, when I felt really confident, now I have to admit, I wouldn’t be surprised if I passed or didn’t. Results will be out in about 6 weeks.
You can imagine my surprise when reading through my weekly NAEA E@lert and finding my own name and a link to my blog! Wow! Thanks, NAEA–and welcome to my peers visiting my site for the first time.