Many successful businesses began in garages or around kitchen tables. And many businesses lose money in their early years. However, some ventures that begin with business aspirations never make money and turn into expensive hobbies.
Working for Profit
In order to qualify as a business, the activity must be operated with the intention and potential to earn a profit, even if it is not profitable every year. For any given tax year, the IRS will presume that your activity is operated for profit if it has earned a profit in three of the previous five years, including the current year. If you are just starting your business, you can file Form 5213 and request that the determination be delayed until you have five years of business experience.
If your activity does not pass the three-year profitability test, the IRS will take into account all facts and circumstances regarding the activity in order to determine whether you can deduct business losses from other income. These are some questions you should consider, but no single factor is decisive.
This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2020 Broadridge Investor Communication Solutions, Inc.
Terence S. Phillips
is the founder of
79% of Americans agree they would benefit from having basic financial education and information.
Source: The 2018 Consumer Financial Literacy Survey, The National Foundation for Credit Counseling.
45% of American workers have saved less than $25,000 for retirement, and 26% have saved less than $1,000.
Source: Employee Benefit Research Institute, 2018
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