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Avoiding Hobby Classification

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June 19, 2014

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The IRS allows you to take a tax deduction for legitimate losses incurred in the operation of your business. However, if your business claims a net loss for too many years, or fails to meet other requirements, the IRS may classify it as a hobby, which would prevent you from claiming a loss related to the business. If the IRS classifies your business as a hobby, you’ll have to prove that you had a valid profit motive if you want to claim those deductions. Running a hobby as a business could very possibly trigger an IRS audit. If your business is legitimate, keeping accurate and extensive records could help prevent the classification of your business as a hobby. In addition, a written business plan is often a prerequisite for indicating intent for profit, and it can also show ways in which you are modifying your business to cope with losses.

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For more information on small business taxes or hobby business tax rules, contact a Nevada Corporate Headquarters representative at 1-800-508-1729.

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