| FORTUNE Small Business: | |
Business or hobby? Deductions differ
FSB explains the tax situation and how you can postpone making the distinction.
(FORTUNE Small Business) -- Dear FSB: What is the IRS form that grants a seven year postponement for determining whether or not a business qualifies as a business or as a hobby? This exemption gives a small company a few years in which to turn a profit and thereby qualify as a business.
- Toribio Garza, San Antonio
Dear Toribio: What you're looking for is called Form 5213. It actually postpones determination of whether you're a business until the close of the fourth tax year. If your activity consists of breeding, training, or racing horses, you may be able to extend this period until the end of the sixth year.
Although it can be tricky, making a distinction between a business and a hobby can make a lot of difference when it comes to filing taxes. Luckily, the IRS website has a list of useful points that can help you figure out which side of the fence your activity falls on.
Generally, an activity is considered a business rather than a hobby if it makes profits for at least three out of the past five years.
Keep in mind that while you may deduct losses in your tax statement if you're running a business, you can't do that with a hobby, says Michael Sackett, CEO of California-based Michael Sackett & Associates, Inc. Even though you can claim some itemized deductions for a hobby on Form 1040, there are special rules and limits, according to the IRS website. And remember that these deductions can never exceed the gross income from your activity. 
A quick question from FSB: For a future story, we would like to find business owners who routinely sleep no more than 4 to 6 hours per night. If you're a night-owl entrepreneur, write to Anne Fisher at afisher@fortunemail.com and tell us how you adapted to your current schedule.
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