TaxReturnGuide.com Forum Index
 
 FAQFAQ   SearchSearch   MemberlistMemberlist   UsergroupsUsergroups   RegisterRegister   ProfileProfile   Log in to check your private messagesLog in to check your private messages   Log inLog in 

What qualifies as "business" for Sched C purposes?

 
Post new topic   Reply to topic    TaxReturnGuide.com Forum Index -> Taxes - Misc.
Author Message
nomail1983



Joined: 25 Aug 2007
Posts: 36

PostPosted: Wed Feb 28, 2007 9:55 pm    Post subject: What qualifies as "business" for Sched C purposes? Reply with quote

Sched C instructions seems to have only this "definition" of a
business (from the introduction):

"An activity qualifies as a business if your primary purpose for
engaging in the activity is for income or profit and you are involved
in the activity with continuity and regularity. For example, a
sporadic
activity or a hobby does not qualify as a business."

That's a very "fuzzy" definition. As I understand that definition, I
do
not actually need to have any income. That simply needs to be my
"primary purpose" (with "continuity and regularity") -- cross my heart
and hope to die Smile.

I thought there was a more rigorous requirement; for example, I had
to have income in N of M years (3 out of 5 years, as I recall).

In any case, my question is: is there an IRS Pub or other document
with a more rigorous definition of "an activity that qualifies as a
business"?

Also, I really do not know how to answer Line 32 of Sched C. My
only "investment" in my (business) activity is the annual expenses
that I incur.

Does that qualify for Line 32a ("all investment is at risk")?

None of the examples for Line 32b ("some investment is not at risk")
in the Sched C instructions seems to apply.

Archived from group: misc>taxes
Back to top
View user's profile Send private message
ed



Joined: 25 Aug 2007
Posts: 336

PostPosted: Wed Feb 28, 2007 11:07 pm    Post subject: Re: What qualifies as "business" for Sched C purposes? Reply with quote

On Feb 28, 6:55 pm, "nomail1...@hotmail.com"
wrote:
> Sched C instructions seems to have only this "definition" of a
> business (from the introduction):
>
> "An activity qualifies as a business if your primary purpose for
> engaging in the activity is for income or profit and you are involved
> in the activity with continuity and regularity. For example, a
> sporadic
> activity or a hobby does not qualify as a business."
>
> That's a very "fuzzy" definition. As I understand that definition, I
> do
> not actually need to have any income. That simply needs to be my
> "primary purpose" (with "continuity and regularity") -- cross my heart
> and hope to die Smile.
>
> I thought there was a more rigorous requirement; for example, I had
> to have income in N of M years (3 out of 5 years, as I recall).

It's a PROFIT in 2 of the past 5 years, and that's a restiction for
the IRS not to claim you're a hobby, not that you have to prove
anything.
>
> In any case, my question is: is there an IRS Pub or other document
> with a more rigorous definition of "an activity that qualifies as a
> business"?
>
> Also, I really do not know how to answer Line 32 of Sched C. My
> only "investment" in my (business) activity is the annual expenses
> that I incur.
>
> Does that qualify for Line 32a ("all investment is at risk")?

yes

>
> None of the examples for Line 32b ("some investment is not at risk")
> in the Sched C instructions seems to apply.

I think it would be tolerable if you didn't have any income in the
first year, and maybe even the second if there was a valid reason,
and/or didn't have any profit for 5 years, if it looked like you
really were *trying*. I have a S-corp that hasn't shown a profit for
10 years and I take a loss for it every years on line 17 of 1040, but
I DO have income.

ed
Back to top
View user's profile Send private message
nomail1983



Joined: 25 Aug 2007
Posts: 36

PostPosted: Thu Mar 01, 2007 1:10 am    Post subject: Re: What qualifies as "business" for Sched C purposes? Reply with quote

On Feb 28, 6:07 pm, "ed" wrote:
> > I thought there was a more rigorous requirement; for example, I had
> > to have income in N of M years (3 out of 5 years, as I recall).
>
> It's a PROFIT in 2 of the past 5 years, and that's a restiction for
> the IRS not to claim you're a hobby, not that you have to prove
> anything.

Can you point me to the IRS document (or instructions) where that is
written?

I'm just wondering what I overlooked in my search for that.
Back to top
View user's profile Send private message
Shyster1040



Joined: 25 Aug 2007
Posts: 1791

PostPosted: Thu Mar 01, 2007 4:12 pm    Post subject: Re: What qualifies as Reply with quote

Fortunately or unfortunately, there is no single, hard and fast definition
of a trade or business for purposes of the IRC.

Generally, the determination is based on all the facts, and a trade or
business will usually be found if you engage in an activity for profit,
and your participation is regular, continuous, and substantial.

That being said, at least in the start-up years, you do not need to have
positive net income from an activity in order for it to constitute a trade
or business.

The 3 out of 5 rule you refer to is not a hard and fast requirement for
the existence of a trade or business; instead, it is a rebuttable
presumption in favor of the taxpayer that is used to distinguish between
hobbies (for which deductions are, in general, limited to the income
derived from that activity) and an "activity engaged in for profit." See
Code Sec. 183.

Under the presumption, if a taxpayer has net income for 3 of the prior 5
taxable years, the taxpayer's activity is an activity carried on for
profit and not a hobby unless the IRS can prove otherwise.

However, even if you meet the 3 out of 5 test, that does not mean ipso
facto that you have a trade or business; instead, it means that you have
an "activity engaged in for profit," which could be either a trade or
business, or an investment activity.

Thus, you would still be required to show that the activity was more than
an investment activity, namely by showing that you participated in the
activity on a regular, continuous, substantial basis.

For purposes of line 32 of Sch. C, your "investment" in the activity in
question is the amount of cash, and the FMV of property, you have spent on
or contributed to the activity.

Thus, money that you have taken out of your personal accounts and expended
on the activity would constitute part of your "investment" in the
activity.
Back to top
View user's profile Send private message
Paul A. Thomas



Joined: 25 Aug 2007
Posts: 371

PostPosted: Thu Mar 01, 2007 4:19 pm    Post subject: Re: What qualifies as "business" for Sched C purposes? Reply with quote

wrote
> Sched C instructions seems to have only this "definition"
> of a business (from the introduction):
>
> "An activity qualifies as a business if your primary purpose
> for engaging in the activity is for income or profit and you
> are involved in the activity with continuity and regularity. For
> example, a sporadic activity or a hobby does not qualify
> as a business."
>
> That's a very "fuzzy" definition. As I understand that definition,
> I do not actually need to have any income.


You had better, at some point, have income, or something you can point to
and decalre "That'll be income - some day".




> That simply needs to be my "primary purpose" (with "continuity
> and regularity") -- cross my heart and hope to die Smile.


I'm pretty sure you don't want them to hold you to that standard.




> I thought there was a more rigorous requirement; for example,
> I had to have income in N of M years (3 out of 5 years, as I recall).
>
> In any case, my question is: is there an IRS Pub or other
> document with a more rigorous definition of "an activity
> that qualifies as a business"?


Nope. Just as there isn't a list of what is income, or what is an expense.
It's not that they're trying to trick anyone, it's that you can't make a
comprehensive list of either.




> Also, I really do not know how to answer Line 32 of Sched C.
> My only "investment" in my (business) activity is the annual
> expenses that I incur.
>
> Does that qualify for Line 32a ("all investment is at risk")?
>
> None of the examples for Line 32b ("some investment
> is not at risk") in the Sched C instructions seems to apply.



If it's all your money, then you are "at risk".





--
Paul A. Thomas, CPA
Athens, Georgia
paulthomascpapc@bellsouth.net
Back to top
View user's profile Send private message
nomail1983



Joined: 25 Aug 2007
Posts: 36

PostPosted: Thu Mar 01, 2007 2:13 pm    Post subject: Re: What qualifies as "business" for Sched C purposes? Reply with quote

On Mar 1, 8:19 am, "Paul A. Thomas"
wrote:
> > In any case, my question is: is there an IRS Pub or other
> > document with a more rigorous definition of "an activity
> > that qualifies as a business"?
>
> Nope. Just as there isn't a list of what is income, or what is an expense.
> It's not that they're trying to trick anyone, it's that you can't make a
> comprehensive list of either.

Thanks for the analogy. And thanks to all who responded. I think I
understand clearly now.

Back to top
View user's profile Send private message
Display posts from previous:   
Related Topics:
business expenses when business not yet formed Hi. I was wondering whether I can deduct business expenses when business is not yet formed. My plan is to sell software next year, so right now I'm building the software. If I'm not selling stuff now, then I don't have to worry about business taxes ($8

Business tax I started a non-profit company in 2006 and have not got tax-exempt status (we are a tiny company that net income in 2006 is only $76). We have filed the tax return for the state and are about to file 990-EZ to IRS next week. But do we owe IRS tax? If so,

Help With Small Business - thank you Hello, This is a great news group. Background: I have used TaxCut Prem w/state these past several years, seems okay. I have a Sole / DBA Chiropractic practice. I have a Sole / DBA IT consulting firm. Both are JUST me! Income

business loss What do I do with Schedule C losses to apply them to a previous years (unpaid) tax bill? I know there is some form or another to figure it out. I've made a profit 8 out of 10 years so this isnt a hobby question. I think TY 2000 was my other loss year

New Business Directory Post details and information about your business in the business directory at: Up to five photographs and a 500-word writeup allowed *per listing*. Much better than Yellow Pages, Green Book, or Super Pages. This is a directo
Post new topic   Reply to topic    TaxReturnGuide.com Forum Index -> Taxes - Misc. All times are GMT
Page 1 of 1

 
Jump to:  
You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot vote in polls in this forum


Powered by phpBB © 2001, 2005 phpBB Group