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this is not exactly true, there has to be a reasonable chance that this is a profitable enterprise defined both by your effort/intention and at least some profi

by jotto 16y ago

this is not exactly true, there has to be a reasonable chance that this is a profitable enterprise defined both by your effort/intention and at least some profitability over a period of time. if it doesn't meet these standards, it's a hobby and you cannot deduct associated expenses. see here: http://www.irs.gov/newsroom/article/0,,id=169490,00.html http://www.irs.gov/newsroom/article/0,,id=169490,00.html

bhousel 16y ago
You are correct, in this case the person does make a little bit of money from photography, some from friends and some from stock photography sites. He did speak with a tax expert and is apparently in the clear as far as the IRS is concerned. I think his "income" is somewhere in the $100/year range. My point was just that there are a lot of activities that most of us might be doing anyway for fun, not considering the tax advantages of organizing a business. e.g. amateur photography, helping people with computer and website issues, personal services, blogging, etc.
rprasad 16y ago
That's not actually what the IRS is saying. The point of the business/hobby distinction is to prevent individual taxpayers from deducting losses for hobby activities. If the activity is profitable, the taxpayer gets taxed, so the IRS couldn't care less whether its a hobby or an actual business. Attempts to generate profit by incorporated entities are, by definition, business activities. For pass-through entities like LLCs and S-Corps, this means that they are treated as business activities for purposes of taxing the managing/active investors. The activities don't have to have a reasonable chance of being profitable; otherwise, speculative ventures would never be treated as businesses. The key test of whether something is a business activity is whether it generates revenue and whether the taxpayer puts effort into generating revenue. For example: painting is normally a hobby, unless the painter also puts effort into selling those paintings.

by jotto 16y ago

bhousel 16y ago

You are correct, in this case the person does make a little bit of money from photography, some from friends and some from stock photography sites. He did speak with a tax expert and is apparently in the clear as far as the IRS is concerned. I think his "income" is somewhere in the $100/year range. My point was just that there are a lot of activities that most of us might be doing anyway for fun, not considering the tax advantages of organizing a business. e.g. amateur photography, helping people with computer and website issues, personal services, blogging, etc.

rprasad 16y ago

That's not actually what the IRS is saying. The point of the business/hobby distinction is to prevent individual taxpayers from deducting losses for hobby activities. If the activity is profitable, the taxpayer gets taxed, so the IRS couldn't care less whether its a hobby or an actual business. Attempts to generate profit by incorporated entities are, by definition, business activities. For pass-through entities like LLCs and S-Corps, this means that they are treated as business activities for purposes of taxing the managing/active investors. The activities don't have to have a reasonable chance of being profitable; otherwise, speculative ventures would never be treated as businesses. The key test of whether something is a business activity is whether it generates revenue and whether the taxpayer puts effort into generating revenue. For example: painting is normally a hobby, unless the painter also puts effort into selling those paintings.