A weekly look at Wyoming business questions from the Wyoming Small Business Development Center, part of WyomingEntrepreneur.Biz, a collection of business assistance programs at the University of Wyoming.
By Leonard Holler, Wyoming Small Business Development Center regional director, Casper.
"If my business is not profitable, will the IRS consider it a hobby or a business?" Sandy, Glenrock
The Internal Revenue Service looks at unprofitable businesses with a doubtful eye. The laws and regulations, however, do not provide a specific definition of what constitutes a trade or business because no single definition can apply to all cases.
Generally, a trade or business must be an activity that is carried on with a profit motive and with economic activity conducted. The problem is that the "burden-of-proof" is the business owner's.
The IRS considers several key factors in determining whether a business engages in activities for a profit. Some of those criteria are: It must be done in a business-like manner similar to other activities of the same nature that operate profitably; the expertise of the business owner; and time and effort toward the business. Relying on profits from the business for personal living expenses is also an indicator. Start-up losses that may occur do not control distinction, but continued losses without any attempts to improve or correct the business might indicate you are not striving to make a profit.
There must be a good faith objective and expectation of making a profit to have the business taxed as such.
If the business is struggling, seek advice, and consider its effect on the business's profitability. If you think it will make it more profitable, why not implement the changes? It will help support the argument that you are in business and it is not a hobby.
A blog version of this article and an opportunity to post comments is available at http://www.wyomingentrepreneur.typepad.com/blog/.
The WSBDC is a partnership of the U.S. Small Business Administration, the Wyoming Business Council and the University of Wyoming. To ask a question, call 1-800-348-5194, e-mail wsbdc@uwyo.edu or write 1000 E. University Ave., Dept. 3922, Laramie, WY 82071-3922.
Posted on Tuesday, August 04, 2009