Peter Iannone, Managing Director, CVBIZ MHM, LLC 300
Esplanade Drive #250 Oxnard, CA 93036
Plannone@CBIZ.com
310-268-2750
Listed below are nine factors that the IRS looks at to decide whether an activity is run for profit (even if losses have resulted), or as a hobby. A "yes" answer supports a finding of a profit motive, although no one factor settles the matter.
1) How the business is run - is the activity carried on in a businesslike manner? Does the owner keep complete and accurate business records and books? Has the owner changed business operations to increase profits?
2) Expertise - does the owner have the necessary expertise to run the business? If not, does he or she seek (and follow) expert advice?
3) Time and effort - does the owner spend the time and effort needed for the business to succeed (Spending a lot of time on the activity will not, however, prove a profit motive if the activity has significant personal or recreational aspects.)?
4) Appreciation - is it likely that business assets will appreciate in value over time? A profit motive can exist if gain from the eventual sale of assets, plus any other income, would result in an overall profit even if there's no profit from current operations.
5) Success with other activities - has the owner engaged in similar (or dissimilar) activities in the past and converted them from unprofitable to profitable enterprises?
6) History of income or loss - did the business losses occur because the business was still in a startup phase, or because of unforeseen circumstances? If the owner continues the activity despite continuing losses for many years it may indicate that the activity is a hobby.
7) Amounts of occasional profits - are the amounts of occasional profits significant when compared to the size of the owner's investment in the activity, and the amounts of losses suffered in other years? An occasional small profit for an activity generating large losses, or in which the owner has a large investment, will not establish a for-profit objective.
8) Financial status of owner - is the business activity the only source of the owner's income?
9) Personal pleasure or recreation - is the business of a type that is not usually considered to have elements of personal pleasure or recreation?