The following article, recently issued by the AICPA Tax Advisor, is an excellent reminder of the rules surrounding the tax provisions for a “trade or business.” Various tax items do not apply if the activity is determined to be a hobby or investment.
If an activity fails to qualify as a trade or business because it is not engaged in a ‘for-profit’ motive, it can easily be considered a hobby. Generally, for at least three out of five consecutive years, any activity with more revenue than expenses (i.e., net income) is considered ‘for profit.’ If this is challenged, the final determination of a profit motive looks to the following nine nonexclusive factors:
- The manner in which the taxpayer carries on the activity;
- The expertise of the taxpayer or their advisers;
- The time and effort expended by the taxpayer in carrying on the activity;
- The expectation that assets used in the activity may appreciate in value;
- The success of the taxpayer in carrying on other similar or dissimilar activities;
- The taxpayer’s history of income or losses with respect to the activity;
- The amount of occasional profits, if any, that is earned;
- The taxpayer’s financial status; and
- Elements of personal pleasure or recreation.
The article below also addresses other tax provisions surrounding “trade or business” activities.
If you have any questions, please get in touch with your tax advisor to discuss.
