Creative people doing creative things often run into problems when it is time to file their tax returns. We all believe in our creative hearts that when we create and sell our work that we are working at a business pursuit, but the IRS may see things a little differently. One of the key questions to ask yourself in determining if your writing career or your other artistic pursuit is a business or a hobby is - are you carrying on this activity to make a profit?
Now, of course most writers, artists and other creative people will respond with a resounding YES to this question because we are all planning to support our dreams and our lives with our creative activity. Unfortunately, the IRS being the savvy fiendish folks that they are, make answering that question a bit more complicated. Since a hobby cannot create a loss that can be used to offset other income but a business can create an offsetting loss the IRS is a little particular about exactly how you classify your creative pursuits. While they consider a hobby something you do for enjoyment as opposed to something that you do for profit, they consider a business something you do for profit with or without corresponding entertainment or pleasure.
Given the fact that they are so particular they have kindly given us a list of 9 facts to take into account when trying to determine if you are carrying on your creative activity “For Profit”. Now they advise that “no one factor alone is decisive.” All 9 factors should be considered.
The 9 factors they use to determine if a profit motive exists or not are as follows:
You carry on the activity in a business-like manner,
The time and effort you put into the activity indicate you intend to make it profitable,
You depend on income from the activity for your livelihood,
Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
You change your methods of operation in an attempt to improve profitability,
You, or your advisors, have the knowledge needed to carry on the activity as a successful business,
You were successful in making a profit in similar activities in the past,
The activity makes a profit in some years, but the amount of profit it makes, for instance a very small profit of $2 or $5 or even $25 might not be considered a large enough profit to prove profit motive, and
You can expect to make a future profit from the appreciation of the assets used in the activity.
So, there you have it in a typical IRS fashion – as clear as mud. Since this information hasn’t changed over the last several years, hopefully, it will be helpful for the upcoming tax season and for future tax seasons.
For additional information you can refer to IRS Publication 535, Business Expenses on the IRS Website, consult your tax advisor, or call the IRS at 1-800-829-1040 (but be prepared to listen to The Nutcracker Suite for maybe minutes or maybe hours while on hold).
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