How You Can Avoid the IRS Hobby Determination
Author: Keith Huggett
When you are a successful business owner, the IRS is fully aware of it. Being a successful business owner and starting a second business that does not perform as well as it should, tends to throw a red flag at the IRS, indicating that the second business is more of a hobby than a business. To be a "business" your goal must be to have a profit. If, year after year, you claim a loss in your second business, the IRS may take a closer look. Here are some tips for avoiding the Hobby classification:
- Model your "hobby" after your primary business. If this isn't feasible, document why, and come up with a different strategy.
- Create a new business entity for your "hobby" along with new business bank accounts.
- Keep a log of the time and effort you spend working on the business aspects of your "hobby."
- Have a written business plan.
While these tips may not always be enough to avoid the classification of a "hobby" having good records may save you from tax penalties. As always, if you are being contacted by the IRS, we suggest that you seek assistance from a professional tax preparer.
At the Tax Office, Inc., our Tax Professionals are available to answer any questions you may have on taxes, hobby businesses, business entities, or IRS audits. Please contact us with your questions.
