A hobby loss refers to a business that doesn’t turn a profit and may never have the potential to turn a profit.
This type of business might be a side job or something you probably do part time besides your regular full-time job. You may make a little bit of money but at the end of the day the expenses far outweigh the income. By taking the losses you can reduce your income from other sources and reduce your tax bill.
The IRS will consider the following. They look for businesses to turn a profit about three out of every five years.
- Does the time and effort put into the activity indicate an intention to make a profit?
- Does the taxpayer depend on income from the activity?
- If there are losses are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
- Has the taxpayer changed methods of operation to improve profitability?
- Does the taxpayer or his advisors have the knowledge needed to carry on the activity as a successful business?
- Has the taxpayer made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
As a Louisville tax firm we are here to help you answer these questions and others. We help individuals and small businesses in Louisville with all of their tax-related issues. Schedule a first consultation to learn more!