Tax Issues 4
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Do I have to be registered as a business or have a business name to file a business tax return?
For IRS purposes, you do not have to have a business name or be registered as a business with any government authorities. Some states and some municipalities do require anyone who operates a business to get a business certificate or license. Such laws, where they exist, have nothing to do with federal income tax laws, however.
Don't I need an employer identification number to file a Schedule C?
You don't need an employer identification number (EIN) unless you hire employees or start certain types of pension plans.
How many hours a week do I have to work for myself for the IRS to consider what I do a business and not a hobby?
The IRS doesn't set any minimum number of hours. Instead, it wants to know if you have a profit motive for pursuing the activity and if you are carrying out the activity in a businesslike way.
How do I show a profit motive?
The easiest way is by making a profit. If you make a profit pursuing the activity in 3 of the last 5 years including the current one, the IRS will assume the activity is a business. If the activity you are involved in is raising race horses, the time frame for making a profit is extended to 2 of 7 years.
What happens if I don't make a profit within the specified time? Will the IRS automatically declare my business a hobby?
Not necessarily. The 3-out-of-5-year guideline (known as the hobby-loss rule) is a major factor, but not the only one the IRS will look at in determining if something is a business or a hobby. Other things they will consider are:
- Do you carry out the activity in a businesslike manner? (Keep good records. If you don't keep copies of receipts, correspondence, etc., you aren't going to look very businesslike.).
- Does the time and effort you put into the activity indicate you intend to make the activity a profitable business? .
- Do you have the expertise necessary to carry on the activity as a successful business? .
- Do you depend on income from the activity for your livelihood? .
- Are losses due to circumstances beyond your control, or are they normal for the start-up of your kind of business? .
- Have you changed your methods of operation to attempt to improve the profitability of that activity? .
- Have you previously been successful making a profit in a similar business? .
- Will you be able to make a profit in the future from appreciation of assets? .
- Do you materially participate (take an active part) in the business? .
Is any activity that makes a profit considered a business?
No. Occasional profit-making transactions (say, the sale of your childhood stamp collection) would not be considered a business. Additionally, the IRS does not consider you to be in business if what you do is manage your own stock or investment portfolio.
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