What qualifies as "business" for Sched C purposes?

Discussion in 'Tax' started by nomail1983@hotmail.com, Mar 1, 2007.

  1. Guest

    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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    , Mar 1, 2007
    #1
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  2. TxSrv Guest

    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.

    << ======================================================= >>
    << 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. >>
    << ======================================================= >>
     
    TxSrv, Mar 2, 2007
    #2
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  3. <> wrote:

    > 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. >>
    << ======================================================= >>
     
    Seth Breidbart, Mar 2, 2007
    #3
  4. 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. >>
    << ======================================================= >>
     
    Harlan Lunsford, Mar 2, 2007
    #4
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