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Subject Author Date
What qualifies as "business" for Sched C purposes? nomail1983@hotmail.com 03-01-2007
Posted by nomail1983@hotmail.com on March 1, 2007, 7:25 am
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 Sched C instructions seems to have only this "definition" of
a business (from the introduction):

"An activity qualifies as a business if your primary purpose
for engaging in the activity is for income or profit and you
are involved in the activity with continuity and regularity.
For example, a sporadic activity or a hobby does not qualify
as a business."

That's a very "fuzzy" definition. As I understand that
definition, I do not actually need to have any income. That
simply needs to be my "primary purpose" (with "continuity
and regularity") -- cross my heart and hope to die :-).

I thought there was a more rigorous requirement; for
example, I had to have income in N of M years (3 out of 5
years, as I recall).

In any case, my question is: is there an IRS Pub or other
document with a more rigorous definition of "an activity
that qualifies as a business"?

Also, I really do not know how to answer Line 32 of Sched C.
My only "investment" in my (business) activity is the
annual expenses that I incur.

Does that qualify for Line 32a ("all investment is at
risk")?

None of the examples for Line 32b ("some investment is not
at risk") in the Sched C instructions seems to apply.

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Posted by TxSrv on March 1, 2007, 7:00 pm
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 nomail1983@hotmail.com wrote:

> In any case, my question is: is there an IRS Pub or other
> document with a more rigorous definition of "an activity
> that qualifies as a business"?

None that I'm aware of. IRS' definition of a business is
essentially the common law one. What is your actual
situation? W/o facts and $$, no one here can help much.

Fred F.

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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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Posted by Seth Breidbart on March 1, 2007, 9:08 pm
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> I thought there was a more rigorous requirement; for
> example, I had to have income in N of M years (3 out of 5
> years, as I recall).

There used to be a safe harbor, that if you had *profit*
often enough, the activity would be classified as a business
rather than a hobby.

> Also, I really do not know how to answer Line 32 of Sched C.
> My only "investment" in my (business) activity is the
> annual expenses that I incur.
>
> Does that qualify for Line 32a ("all investment is at
> risk")?

Yes. There used to be a loophole where you could borrow
money via a "non-recourse loan" (one that need only be paid
out of revenues from some specific activity), use that money
to buy something (e.g. US rights to an Indian movie), take
deductions and credits based on the "investment", and then
not have to pay the loan because the movie never showed in
the US. (The loan would come from the same company you
bought the rights from, so they weren't out anything when
you didn't pay it; you'd pay something like $10,000 cash out
of your own pocket to set up the deal at $1,000,000.) (In
theory, when the loan became due and wasn't paid, you'd have
phantom income from its discharge; most people just changed
accountants and didn't tell the new one about the deal.)

Since all the money in the business is real money out of
your pocket, "all investment is at risk". That applies even
for (e.g.) a consulting business in which there is no
investment. All the $0 is at risk.

Seth

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Harlan Lunsford on March 1, 2007, 9:08 pm
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nomail1983@hotmail.com wrote:

> Sched C instructions seems to have only this "definition" of
> a business (from the introduction):
>
> "An activity qualifies as a business if your primary purpose
> for engaging in the activity is for income or profit and you
> are involved in the activity with continuity and regularity.
> For example, a sporadic activity or a hobby does not qualify
> as a business."
>
> That's a very "fuzzy" definition. As I understand that
> definition, I do not actually need to have any income. That
> simply needs to be my "primary purpose" (with "continuity
> and regularity") -- cross my heart and hope to die :-).
>
> I thought there was a more rigorous requirement; for
> example, I had to have income in N of M years (3 out of 5
> years, as I recall).
>
> In any case, my question is: is there an IRS Pub or other
> document with a more rigorous definition of "an activity
> that qualifies as a business"?

Probably not, but there are court cases galore which deal
with the issue.

> Also, I really do not know how to answer Line 32 of Sched C.
> My only "investment" in my (business) activity is the
> annual expenses that I incur.
>
> Does that qualify for Line 32a ("all investment is at
> risk")?
>
> None of the examples for Line 32b ("some investment is not
> at risk") in the Sched C instructions seems to apply.

In order to answer your questions, we need to know what kind
of business do you think you're in? And why would there
not be any income? It's a puzzlement.

ChEAr$,
Harlan Lunsford, EA n LA

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

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