Most tax preparers have encountered the client who can't quite distinguish that fine line between a hobby and business. It's up to the tax professional to explain the rules and, in many cases, help the client position what could be called a hobby so it can be considered a bona fide business activity in the eyes of the IRS. Ken Berry's article about a recent Tax Court case in which a documentary filmmaker with a day job as an attorney faced off with the IRS on the hobby loss rules.
The standard hobby loss rule requiring a profit in three out of five years is an excellent starting point for distinguishing a business from a hobby. But there's much more going on behind the scenes when the IRS makes a determination about the real nature of a business venture. Check out the nine factors that will help you and your clients decide how expenses should be classified.