| 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.
7 tax-free havens
Tax obligations for a new merchant
A flighty hobby? Pay $9,000 to watch birds
-
These 5 cities have the fastest-growing foreclosure rates. And they're not the usual suspects. More -
Now you can get the $8,000 credit through June 2010 -- or $6,500 if you're not a first-time buyer. More -
Home prices are forecast to plummet, but these 7 cities are predicted to post gains. More -
Home prices have grown in the beer-guzzling heartland and fell in the wine-sipping coastal states. More -
Investors think Detroit's foreclosed houses are a deal. Would you buy this one for $6,900? More -
Economic growth, affordable wages -- these spots have what entrepreneurs need to thrive. More
