Business vs Hobby

Feb 07, 2008 4 Replies
N

Can someone point me at the elements that distinguish a business (Schedule C) from a hobby (1040 line 21 "other income")?



Here's the thing: I do a lot of contesting (participate in local radio/TV station promo programs, sweepstakes, etc.). I have some small expenses, primarily the costs of driving to the stations to pick up prizes. I could also make a case that a small proportion of my internet connection costs are attributable to this enterprise.



I've made money at this enterprise for the last 3+ years, and would have still made money even if I had been able to deduct my expenses.



I'm considering declaring this to be a Schedule C business so that my expenses are not unreasonably limited by the 2% AGI floor.



Does anyone have any thoughts on this?


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A

Here's what the IRS says:

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Don't miss the line that says: No one factor alone is decisive.

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N

Yup, 'cause otherwise, "You depend on the income for your livelihood" would be a killer, and that would be true for an awful lot of people with side businesses, such as Amway (does Amway still exist?).

Interesting. Thanks very much for the pointer!

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E

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You should have been doing this on a Schedule C since incedption. Sounds like it was your choice to put it on line 21. The "hobby" thing is a forced issue with the IRS, not something you should try to satisfy. If they can't prove you lost money in 3 of the past 5 years they can't force you into hobby status. You could lose money forever and not be a hobby if you are in business to profit, hopefully.

The flip side is that on line 21 you didn't have to pay SE taxes of over 15%. Are you sure you don't want to be a hobby??

ed

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N

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Another excellent point. If my regular consulting biz gets me above the FICA ceiling, then the answer is "yes". Otherwise, you're right: the deductible expenses will be wiped out by SE tax.

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