How do you distinguish between a business and a hobby?

Since hobby expenses are deductible only to the extent of hobby income, it is important to distinguish hobby expenses from expenses incurred in an activity engaged in for profit. In making this distinction, all facts and circumstances with respect to the activity are taken into account and no one factor alone is decisive. Among the factors which should normally be taken into account are the following:

1. Whether you carry on the activity in a businesslike manner
2. Whether the time and effort you put into the activity indicate you intend to make it profitable
3. Whether you depend on income from the activity for your livelihood
4. Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business)
5. Whether you change your methods of operation in an attempt to improve profitability
6. Whether you, or your advisors, have the knowledge needed to carry on the activity as a successful business
7. Whether you were successful in making a profit in similar activities in the past
8. Whether the activity makes a profit in some years, and how much profit it makes
9. Whether you can expect to make a future profit from the appreciation of the assets used in the activity

Additional information on this topic is available in section 1.183-2 (b) of the federal tax regulations.

References:

• Treas. Req. 1.183-2 (b)
• Publication 535, Business Expenses

If I pay personal expenses out of my business bank account, should I count the money used as part of my income, or can I write these expenses off?

You would include the money in income and you would not write the amounts off as expenses. Only business related expenses can be deducted from your business income. It is recommended that you not mix business and personal accounts. This makes it easier to keep records.

References:

• Publication 535, Business Expenses

For business travel, are there limits on the amounts deductible for meals?

Meal expenses are deductible only if your trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. The amount of the meal expenses must be substantiated, but instead of keeping records of the actual cost of your meal expenses you can generally use a standard meal allowance. The amount allowed varies, depending on where and when you travel. Refer to Publication 1542, Per Diem Rates (For Travel Within the Continental United States), for per diem rates.

Generally, the deduction for unreimbursed business meals is limited to 50% of the cost that would otherwise be deductible.

For more information on business travel expenses and restrictions, refer to Tax Topic 511, or Chapter 1 of Publication 463, Travel, Entertainment, Gift, and Car Expenses, and Publication 1542, Per Diem Rates.

Where can I find the per diem rates for foreign countries?

Per diem rates on the Internet. You will find links to per diem rate at. Click on "Per Diem Rates" for links to:

• CONUS per diem rates
• Per diem rates for areas outside the continental United States (OCONUS), such as Alaska, Hawaii, Puerto Rico, and U.S. possessions and
• Foreign per diem rates

I use my home for business. Can I deduct the expenses?

To deduct expenses related to the business use of part of your home, you must meet specific requirements. Even then, your deduction may be limited.

Your use of the business part of your home must be:

• Exclusive (see *exceptions below),
• Regular,
• For your trade or business, AND

The business part of your home must be one of the following:

• Your principal place of business,
• A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or
• A separate structure (not attached to your home) you use in connection with your trade or business.

Additional tests for employee use. If you are an employee and you use a part of your home for business, you may qualify for a deduction. You must meet the tests discussed above plus:

• Your business use must be for the convenience of your employer, and
• You do not rent any part of your home to your employer and use the rented portion to perform services as an employee.

Whether the business use of your home is for your employers convenience depends on all the facts and circumstances. However, business use is not considered to be for your employers convenience merely because it is appropriate and helpful.

*exceptions

You do not have to meet the exclusive use test if you satisfy the rules that apply in either of the following circumstances.

• You use part of your home for the storage of inventory or product samples.
• You use part of your home as a day-care facility.

Form 1040, Schedule C (PDF) filers calculate the business use of home expenses and limits on Form 8829 (PDF). The deduction is claimed on line 30 of Schedule C. Employees claim deduction for business use of home as an itemized deduction on Form 1040, Schedule A (PDF).

For more information refer to Tax Topic 509, Business Use of Home, or Publication 587, Business Use of Your Home (Including Use by Day-Care Providers).

If you lease a vehicle, can you deduct the cost of the lease payments plus the standard mileage rate?

No, if you lease a car you use in business, you may use either the standard mileage rate or claim actual expenses, which would include lease payments. You cannot use both the standard mileage rate and the lease payments.

References:

• Publication 463, Travel, Entertainment, Gift, and Car Expenses
• Tax Topic 510, Business Use of Car

Are excise taxes for a vehicle deductible?

You can deduct as a business expenses all excise taxes that are ordinary and necessary expenses of carrying on your trade or business. Refer to Publication 535 for more information.

If you lease office equipment and machinery with the option to buy, when do you depreciate the purchase price?

If you lease equipment with the option to later buy the equipment, you must first determine whether your agreement is a lease agreement or a conditional sales contract. If, under the agreement, you acquired or will acquire title to or equity in the property, you should treat the agreement as a conditional sales contract. Payments made under a conditional sales contract are not deductible as rent expense. You would start depreciating the equipment on the date you acquired the equipment.

Whether the agreement is a conditional sales contract depends on the intent of the parties. Determine intent based on the facts and circumstances that exist when you make the agreement.

In general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true.

• The agreement applies part of each payment toward an equity interest that you will receive.
• You get title to the property upon the payment of a stated amount required under the contract.
• The amount you pay to use the property for a short time is a large part of the amount you would pay to get title to the property.
• You pay much more than the current fair rental value for the property.
• You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Determine this value when you make the agreement.
• You have an option to buy the property at a nominal price compared to the total amount you have to pay under the lease.
• The lease designates some part of the payments as interest, or part of the payments are easy to recognize as interest.

References:

• Publication 535, Business Expenses

Are business gifts deductible?

If you give business gifts in the course of your trade or business, you can deduct the cost subject to special limits and rules. In general, you can deduct no more than $25 for business gifts you give directly or indirectly to any one person during your tax year. Exceptions may apply. For additional information, refer to Tax Topic 512 and Publication 463, Travel, Entertainment, Gift, and Car Expense.

For additional information on this subject see Gifts.