Rev. date: 12/21/2012
In making the distinction between a hobby or business activity, all facts and circumstances with respect to the activity are taken into account. No one factor alone is decisive. The most common factors which should normally be considered to establish that the activity is a business engaged in making a profit are the
following:
- Whether you carry on the activity in a businesslike manner.
- Whether the time and effort you put into the activity indicate you intend to make it
profitable.
- Whether you depend on income from the activity for your livelihood.
- Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of
business).
- Whether you change your methods of operation in an attempt to improve
profitability.
- Whether you, or your advisors, have the knowledge needed to carry on the activity as a successful
business.
- Whether you were successful in making a profit in similar activities in the
past.
- Whether the activity makes a profit in some years, and how much profit it
makes.
- 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.
Rev. date: 12/21/2012
To deduct expenses related to the part of your home used for business, you must meet specific requirements. Even then, your deduction may be
limited.
Your use of part of your home for business must be:
- Exclusively and regularly as your principal place of business,
- Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or
business,
- In the case of a separate structure which is not attached to your home, exclusively and regularly in connection with your trade or
business,
- On a regular basis for certain storage use,
- For rental use, or
- As a daycare facility
Note:
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 on a regular basis for the storage of inventory or product samples held for use in your trade or business of selling products, but only if your home is the sole fixed location of the trade or
business.
- You regularly use part of your home as a qualifying day-care
facility.
Schedule C (Form 1040)
(PDF) filers calculate the business-use-of-home expenses and deduction
limitations on
Form 8829 (PDF),
Expenses for Business Use of Your Home. The deduction is then claimed on line 30 of Schedule
C.
If you are an employee and use a part of your home for business, you may qualify for a deduction. You must meet the use tests discussed above
plus:
- Your business use must be for the convenience of your employer.
- You do not rent any part of your home to your employer and use the rented portion to perform services as an
employee.
Employees claim the deduction for business-use-of-home expenses as an itemized deduction on
Schedule A (Form 1040) (PDF),
Itemized Deductions. There is a worksheet in
Publication 587,
Business Use of Your Home, to calculate the amount of the deduction.
Note:
Whether the business use of your home is for your employer’s convenience depends on all the facts and circumstances. Business use is not considered to be for your employer’s convenience merely because it is appropriate and
helpful.
Rev. date: 12/21/2012
If you lease a car you use in business, you may not deduct both lease costs and the standard mileage rate. You may
either:
- Deduct the standard mileage rate for the business miles driven. If you choose this method then you must use the standard mileage rate method for the entire lease period (including
renewals).
- Claim actual expenses, which would include lease payments. If you choose this method only the business-related portion of the lease payment is
deductible.
Both of these deductions are reduced by an income inclusion
amount.
Rev. date: 12/21/2012
You must first determine whether your agreement is a lease or a conditional sales contract. If the agreement is a lease, you may deduct the payments as rent. If the agreement is a conditional sales contract, you are treated as the outright purchaser of the equipment. The cost of property used in a trade or business may be recovered through depreciation
deductions.
Whether the agreement is a conditional sales contract depends on the intent of the parties. Determine the parties' intent based on the facts and circumstances that exist when you enter into the
agreement.
In general, an agreement may be considered a conditional sales contract rather than a lease if one or more of the following conditions
exist:
- 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
agreement.
- 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 enter into 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
agreement.
- The agreement designates some part of the payments as interest, or parts of the payments are easy to recognize as
interest.
Rev. date: 12/21/2012
If you give business gifts in the course of your trade or business you can deduct all or part of the costs subject to the following
limitation:
- You can deduct no more than $25 of the cost of business gifts you give directly or indirectly to each person during your tax
year.
- If you and your spouse both give gifts to the same person, both of you are treated as one
taxpayer.
- Incidental costs such as engraving, packing or shipping are not included in the $25
limit.
- Gifts costing $4.00 or less that have your business name permanently engraved on the item, and which you distribute on a regular basis not considered gifts for purposes of the $25 per person
limit.
You need to have records that prove the business purpose of the gift as well as the details of the amount
spent.
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