John Anthony on mon 1 mar 04
Here's a link to a good site that discusses many of the important
points around this issue.
One important fact is that you only need show that you have a "profit
motive", and one test of that is that you have net income three out of
five years. Odd that Amazon.com can lose millions upon millions year
after year, while spending the money of venture capitalists, but a
potter who happens to subsidize some part of their overhead from
another source of income has to be subjected to all sorts of qualifying
tests to deduct the cost of a kiln.
Kathy Forer on mon 1 mar 04
I was audited once while just starting out, a year I made $18K total
from other work and had a business loss. I'd done my own taxes with
help from a friendly accountant and deducted everything I could find.
It was my Schedule C that most concerned the auditor. She went over
every single phone call I made from my downtown non-living studio,
pointing out the personal calls that must have been made. I countered
with business calls made from my home.
But after all the excruciating detail, it seemed they were really after
finding out whether this my business loss was for real or a shelter of
some kind. An $18,000 dollar shelter and the 'interview' took nearly
three hours of US tax-payers time and money! Talk about small fry....
In the end, I showed the auditor photos and slides I had brought and
she told me her daughter was a printmaker. It wasn't entirely cozy, but
I had the feeling I had passed some kind of 'believe it or not'
Bonnie/Jeremy Hellman on mon 1 mar 04
I agree that there is no "requirement" that you show a profit in 2 of 5
years, and it is only one of many "tests" about whether you are running a
business with a profit motive or running a hobby. The truth is that you
probably know in your heart whether or not your primary goal is to make
money (business) or whether you are engaging in an activity you enjoy, and
think it would be nice to make a profit but even if you don't you'll
continue doing it (hobby).
The whole point is that if you are deducting all your expenses against your
income, and find you have a net loss, what are you doing to change the way
you are operating, to TRY to make a profit? Do you do those things that
businesses tend to do, in order to make a profit? Or do you keep on doing
the same old thing and hope that you start selling more? Ask yourself, if
this were your only income in the whole world, what would you do
-When you have other income to live on, the IRS is more likely
(statistically) to examine your schedule C, particularly if it shows a loss.
-You are more likely (statically) to be audited if you have a Schedule C and
you don't itemize deductions. (Even if you do itemize deductions, you are
not "home free.")
-You are more likely (statistically) to have your schedule C examined by a
person if the activity is one that other people do for fun. (Raising horses
is the business usually mentioned here, although ceramics would certainly
-You are also more likely (statistically) to be audited if you live in
certain parts of the US than in other parts.
-You are also more likely (statistically) to have your Schedule C examined
if the total income on the return is high.
-You are more likely (statistically) to have your Schedule C examined if
certain ratios exceed certain thresholds. These ratios are not publicized so
we can only guess what they are.
Many people come out of an IRS audit with few changes on their return, but
the process is usually not fun and it is usually time consuming in a way
that the taxpayer thinks is not productive. If you think that record keeping
to come up with information for your tax return the first time around is a
pain, I assure you that presenting those records 1 1/2 to 2 years later in
an audit is even less enjoyable. And paying a tax professional to come with
you to the audit will never qualify as a fun way to spend money.
Even though I may be the one getting paid to represent clients, I'd rather
prepare a return where a Schedule C business actually looks like a business.
More than once I've told clients that they "can't" claim yet another loss in
the same business, because it doesn't look like they're trying to make a
profit. What I mean is that I'm not comfortable preparing their Schedule C
The whole point is that if you are truly trying to make a profit, but not
succeeding, you will be doing things that should result in your earning a
profit. Maybe your profit will be less than minimum wage, but it should be a
positive number. If your activity is a hobby, my advice is to suck it in and
don't try to deduct expenses that exceed your income.
Maybe I'm getting a little grumpy this time of year, but someone on a
taxation listserv wrote in that last Monday was the tax season solstice,
where the days get longer, and the nights and weekends get longer, too.
Bonnie Hellman, CPA in PA and CO
----- Original Message -----
From: "John Anthony"
Sent: Monday, March 01, 2004 10:13 AM
Subject: Re: taxes, hobby or business
> Here's a link to a good site that discusses many of the important
> points around this issue.
> One important fact is that you only need show that you have a "profit
> motive", and one test of that is that you have net income three out of
> five years. Odd that Amazon.com can lose millions upon millions year
> after year, while spending the money of venture capitalists, but a
> potter who happens to subsidize some part of their overhead from
> another source of income has to be subjected to all sorts of qualifying
> tests to deduct the cost of a kiln.
> John A