When it comes to tax purposes, the IRS considers an activity as a business as long as it is regularly and continuously working with the primary purpose of earning a profit. Even if a business incurs losses when starting, as long as the primary goal is to make money, it will still qualify as a business. It’s important to note that a business can be conducted from home, full-time or part-time, and you can have more than one business simultaneously. However, if the primary purpose is something other than making a profit, such as to incur deductible expenses or just for fun, the IRS may consider it a hobby and could lead to potentially disastrous tax consequences.
When it comes to demonstrating that an activity is considered a business for tax purposes, several things can be done to show that you carry on your activity in a businesslike manner. These include: keeping good business records, opening a separate checking account, creating a business plan, obtaining business cards and letterhead, creating a website, obtaining necessary licenses and permits, having a separate phone line, and joining professional organizations and associations. These steps not only help you with the IRS but also help you to earn a profit or understand that the business will not be profitable. Showing an intent to make a profit is crucial, and these steps, along with good record keeping, can help prove that to the IRS.
Starting a business can be challenging, and it’s common for a business to incur losses in the early stages of operation. Even if your business is not profitable in the short term, you may still be considered a business for tax purposes as long as you demonstrate that your primary intent is to earn a profit. If you ever face an audit, it is crucial to show that your business isn’t a hobby, such as keeping accurate records and proving that you have engaged in business-related activities. Keep in mind that the IRS will look at whether you behave as though you want to make money and not just to have fun or accumulate tax deductions. If you need clarification about your business status, it’s always best to consult a tax professional.