The Nine Factor Business Test Has Never Been More Important


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Effective January 1, 2018, hobbies that make a little money are a tax nightmare.

In the past, if you had a loss from your hobbies, you couldn’t take a deduction. That hasn’t changed. Here’s what has changed.

If you made a little bit of money from your hobby, maybe selling some craft item you made or winning a prize for a competition, it didn’t matter tax-wise because your expenses way outweighed the slight income you’d make.

That all changed effective 1/1/2018 when hobby expenses were no longer allowed to be deducted.

That means if you spend $2,000 on your knitting hobby and sell a crocheted shawl for $100, it’s 100% taxable. No deductions.

The solution is to become a business! You don’t want a hobby. You want a business. Here’s a test I developed years ago, in line with the IRS guidelines, to help you determine if you have a business.

The IRS Nine Steps to Business Quiz

Are you operating a business or a hobby? Take this quick test to find out!

Instructions:

  1. Line one Fill in the name of your company.
  2. Line two Fill in the type of business your company does.
  3. Questions Answer the questions with yes or no. Each no answer weakens your position as a business.

Factor One: Businesslike Manner

  1. Do you have a separate bank account for your business?
    Yes ☐   No ☐
  2. Do you (or your CPA or bookkeeper) keep accounting records
    for your business?

    Yes ☐   No ☐
  3. Do you keep copies of receipts in a filing system?
    Yes ☐   No ☐
  4. Do you make an effort to collect accounts receivable?
    Yes ☐   No ☐
  5. Do you review profit and loss statements regularly?
    Yes ☐   No ☐

Factor Two: Time and Effort

  1. Do you keep track of time spent in your business activity?
    Yes ☐   No ☐
  2. Do you keep track of business appointments in a schedule or diary?
    Yes ☐   No ☐
  3. Do you have notes of conversations you have had with consultants
    or experts to enhance your business?

    Yes ☐   No ☐
  4. Do you keep evidence from business seminars that you have attended?
    Yes ☐   No ☐

Factor Three: Dependence on Income

  1. Do you need the income from your business for your lifestyle?
    Yes ☐   No ☐
  2. Do you intend to replace your current job with this business?
    Yes ☐   No ☐

Factor Four: Reasonable Losses

If you have losses, do you have documentation that:

  1. They are normal for the type of business you are in at the beginning?
    Yes ☐   No ☐
  2. Shows that other similar businesses have experienced the same
    type of downturn?

    Yes ☐   No ☐

Factor Five: Effort to Make Money

If you have losses, do you have evidence that:

  1. You have made changes to try and improve your business?
    Yes ☐   No ☐
  2. You have investigated ways to make your business more profitable?
    Yes ☐   No ☐
  3. You have consulted with experienced business owners
    or other advisors regarding your business?

    Yes ☐   No ☐

Factor Six: Experienced Advisors

  1. Have you identified the advisors you need for your business?
    Yes ☐   No ☐
  2. Do your advisors have the business experience needed to give you
    good advice?

    Yes ☐   No ☐

Factor Seven: Your Experience

  1. Have you been successful in this type of business before?
    Yes ☐   No ☐
  2. Have you been successful in a similar business?
    Yes ☐   No ☐

Factor Eight: Past Profit

  1. Has your business been profitable in previous years?
    Yes ☐   No ☐
  2. If your business has been profitable, has the profit been enough
    to make a reasonable decision to continue your business?

    Yes ☐   No ☐

Factor Nine: Asset Appreciation

  1. Is your business building assets that will have future appreciation?
    Yes ☐   No ☐

Scoring the Test

For each of the nine sections above, rate how strong your case is as to business purpose on a scale of
1 to 5, with 5 being the strongest.

 

Businesslike manner12345
Time and effort12345
Dependence on income12345
Reasonable losses12345
Effort to make money12345
Experienced advisors12345
Your experience12345
Past profit12345
Asset appreciation12345

 

For your weakest elements, what can you do to strengthen your point score?

                                                                                                                                      

 

                                                                                                                                      

 

Got a question about your business and taxes? Make sure you go to www.YouTube.com/USTaxAid to subscribe for your daily tax minute!



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