Quote:
Originally Posted by BatteryPowered
Are there still rules about a "business" having to show a profit once every few years or the activity being considered a hobby? I am not a CPA...my son is...but have not asked.
Most of the officials I know only declare income reported to them on a 1099. Around here, schools and/or districts pay directly to the individual and with the high number of school districts and private schools in the area (a large metropolitan area) virtually nobody is paid enough by a single entity to reach the 1099 mark.
Years ago I got a tax ID and tracked all the income and expenses for two years. The first year I finished in the red by about $100...the second year I finished in the black by less than that. That is when I stopped tracking everything.
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Here is the answer to your question. This is from the 2014 version of Publication 535:
"Presumption of profit. An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. The activity must be substantially the same for each year within this period. You have a profit when the gross income from an activity exceeds the deductions.
"If a taxpayer dies before the end of the 5-year period, the "test" period ends on the date of the taxpayer's death.
"If your business passes this 3-years of profit test, the IRS will presume it is carried on for profit. This means the limits discussed here will not apply. You can take all your business deductions from the activity, even for the years that you have a loss. You can rely on this presumption unless the IRS later shows it to be invalid."
So, basically, if you pass this test, then in years when you show a loss, you can take that loss against other income. Otherwise, your deductions are limited to the amount of income you produce.
I should also point out, as have others in this thread, that ALL INCOME is taxable, NOT JUST THAT WHICH IS REPORTED TO YOU ON A 1099.
I think Battery Powered is due for an audit.