A home business tax question

sewladyshelper · April 2009

Greetings everyone. I`m hoping someone can confirm or debunk what my tax guy is telling me. My wife has a home based embroidery business and we have been claiming it on our personal income taxes for the past four years. My tax guy informed me that the IRS requires that a home based business MUST show a profit two out of every five years, or it`s considered a hobby and therefore cannot be used as a deduction. My question: Is this true or not? I ask this primarily because a friend of mine also has a home based business which he says he has been claiming losses just about every year since he began it seven years ago. The business is his primary source of income, while my wife`s is more like a second job at this point. Also, I don`t know his corporate status, whether he`s an LLC or what. We are strictly a mom and pop type operation right now. If you know of a particular IRS reg, that would help me immensely.

Thanks for the help on this.
Mark
sewladyshelper4/1/2009 10:15 AM

sewladyshelper · April 2009

Thanks, Ken

Do you by chance know of an IRS reg that cites this. I`d like to be able to use this to make my accountant feel more at ease.

Mark

Videography · April 2009

You need a new accountant if he/she is vague on something this basic.

sewladyshelper · April 2009

I`ll bite on the vague comment. Please elaborate.

Mark

Videography · April 2009

There is no "2 of 5" rule. It is simply an examiner`s guideline. If you are truly in business to make money and your expenses are genuinely aimed at making money, then you are a business. If the deductions don`t support the business or appear trivial, then expect it to become a hobby in the eyes of the IRS.

A home business tax question

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