– If a new business consistently generates losses, the IRS may consider it a hobby rather than a business, and you won’t be able to deduct those losses.
– However, if the new business is profitable, all otherwise allowable expenses are deductible, even if they exceed income.
– Before 2018, deductible hobby expenses had to be claimed as miscellaneous itemized deductions subject to a 2%-of-AGI “floor,” but from 2018 through 2025, deductible hobby expenses are effectively wiped out.
– To avoid the hobby loss rules, one must show a profit in at least three out of five consecutive years (or two out of seven years for certain activities involving horses) or run the venture in such a way as to show that there is a profit-making objective. – The couple had a business plan and kept separate records.
– They conducted the activity in a businesslike manner.
– The couple had an actual and honest objective of making a profit.
– The IRS and courts will consider various factors to determine the profit-making objective of a venture.
Want to Turn a Hobby into a Business? Watch Out for the Tax Rules!
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