Don't quit your day job

February 12, 2014 by Carol Thompson, EA

I’m sure you remember when Susan Boyle became an overnight web sensation. Since then, thousands of hopeful musicians, writers, artists, and dancers are uploading videos in the hope of becoming the next millionaire. The bottom line is don’t quit your day job. There are rules guiding what constitutes a business.

The first and foremost is whether you made any money. Not necessarily a profit, but money in the till. You might want to be the next big thing, but if you haven’t sold a single download, don’t quit your day job! There are 9 factors the IRS follows to determine whether or not you are in a profit motivated business. These were compiled from years of court cases and rulings distilled into a single list. Please use the link below to read the details of these items.

1. Manner in which the taxpayer carries on the activity (keeping books, business cards, ads);
2. The expertise of the taxpayer or his advisors (tax professional, accountant, lawyer);
3. The time and effort expended by the taxpayer in carrying on the activity (full time work elsewhere?);
4. Expectation that assets used in activity may appreciate in value (examples such as dogs or horses);
5. The success of the taxpayer in carrying on other similar or dissimilar activities (have been self-employed before);
6. The taxpayer’s history of income or losses with respect to the activity (does the history of the activity show any profit in any year?);
7. The amount of occasional profits, if any, which are earned (small profits, large investment; or losses in relation to other income);
8. The financial status of the taxpayer (does the activity create a large tax benefit to the taxpayer?); and
9. Elements of personal pleasure or recreation (personal motives with recreational elements can prove that there is no intent to make a profit).

The IRS follows these factors when auditing a small business with a long history of losses. Ask yourself if you would keep a corner grocery store open if it lost $30,000 a year. Can you afford to support that kind of loss year after year? If the answer is no – please don’t quit your day job until you have your first Gold Record!

For a complete list of the factors and explanations to prove you are in a business with a profit motive, go to http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/IRC-183-Activities-Not-Engaged-in-For-Profit-ATG and click on “Appendix A – Treas. Regs. §1.183-2(b).