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Ask Robin D. Your Own Question
Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15332
Experience:  15years with H & R Block. Divisional leader, Instructor
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I started a business about 4 years ago. I am new to business

Customer Question

I started a business about 4 years ago. I am new to business and have had little to no training on best practices, but have been slowly learning. I have depreciation set up with my taxes through a local tax service. This year I haven't made any money with the business. My family functions within a $50,000 a year or less income. and I have gone back to school to learn some of the things needed to excel in my business. I haven't made very much money at all with my business, but the nature of the business is as such that it only takes the right artist with the right song and it could turn extremely profitable. you guessed it, Its a recording studio. Over the years I have had to learn some hard lessons and because of that I have focused on creating a mobile recording studio to increase in potential profitability. I have just now gotten a handle on invoices and studio logging. I also have realized I have undercharged for my time and resources in the past. To make a long story short, I am determined to make this a profitable business, but my tax lady is just now questioning whether it is a hobby or a business. Everything I have read tells me that I should still proceed as a business.but i don't want to unduly claim losses in a year that the business was temporarily "suspended" due to time constraints and restructuring. I takes me working a 9 to 5 job to buy the equipment necessary to be successful in this business and I have been trying to learn about customer acquisition. My tax lady is telling me now that I might have to pay back money I received for depreciated equipment. I have already made a profit this year, so what do I do. She is being very evasive towards my questions and just keeps telling me she cannot make the determination of whether I am a business or hobby, I have to make that determination, but i don't know ll of the tax "language". I just know I am determined to build this business even if it takes a little time.
Submitted: 1 year ago.
Category: Tax
Expert:  Robin D. replied 1 year ago.
HelloYou do not get to decide, the IRS classifies an activity as either a hobby or a business.The general rule is that if you have not turned a profit in at least three of the prior five years, the IRS will categorize your business as a hobby. A written business plan is often a prerequisite for indicating an intent for profit, and it can also show ways in which you are modifying your business to cope with losses.If your business has ended any of those first 4 years with a Net Income then you are still fine.Reg. Sec. 1.183-2(b) offers nine factors, including examples, a tax preparer may use to assist a client make such a determination.Whether you carry on the activity in a businesslike manner.Whether the time and effort you put into the activity indicate you intend to make it profitable.Whether you depend on income from the activity for your livelihood.Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).Whether you change your methods of operation in an attempt to improve profitability.Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.Whether you were successful in making a profit in similar activities in the past.Whether the activity makes a profit in some years and how much profit it makes.Whether you can expect to make a future profit from the appreciation of the assets used in the activity.No one factor alone is decisive.