By Dave Denniston, CFA
Have you ever wondered… is my business a hobby?
You may have heard that having a small business is one of the best tax deductions out there.
But… when is a business a business and when is my ‘business’ a hobby?
Question# 2: Do you depend on income from the activity?
Let’s take a look at a couple of examples.
One physician I work with is an expert witness. He does this ‘on the side’. He makes substantial income- 100k+ a year from this activity in addition to his work at an academic hospital.
He depends on this activity to help save for retirement, pay off his mortgage, etc. So, in this case, he is dependent on the income.
He could take a year off and only make $10k from this business and still do some write-offs.
Definitely a business and not a hobby. There’s a history of profits here.
Question# 3: If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
This gives you some grace in a really bad year or if you are just getting started.
There is NOTHING wrong with taking a write-off when you are launching a business. You may not yet have revenues or they may be very meager.
There is also NOTHING wrong with having a bad year and taking a fat write-off in the process.
The problem is when you never ever, never ever make a profit and it doesn’t appear to be anywhere on the horizon after 2 years.
You can always launch and try a new business after those 2 years and take another write-off.
Although, after a while… you might wonder if your money was better invested elsewhere.