How do you distinguish between a business and a hobby?
Since hobby expenses are deductible only to the extent of hobby income,
it is important to distinguish hobby expenses from expenses incurred in an
activity engaged in for profit. In making this distinction, all facts and
circumstances with respect to the activity are taken into account and no one
factor is determinative. Among the factors which should normally be taken
into account are the following:
- Whether you carry on the activity in a businesslike manner
- Whether the time and effort you put into the activity indicate you intend
to make it profitable
- Whether you depend on income from the activity for your livelihood
- Whether your losses are due to circumstances beyond your control (or are
normal in the startup phase of your type of business)
- Whether you change your methods of operation in an attempt to improve
- Whether you, or your advisors, have the knowledge needed to carry on the
activity as a successful business
- Whether you were successful in making a profit in similar activities in
- Whether the activity makes a profit in some years, and how much profit
- Whether you can expect to make a future profit from the appreciation of
the assets used in the activity
Additional information on this topic is available in section 1.183-2 (b)
of the federal tax regulations.
If I pay personal expenses out of my business bank account, should
I count the money used as part of my income, or can I write these expenses
You would include the money in income and you would not write the amounts
off as expenses. Only business related expenses can be deducted from your
business income. It is recommended that you not mix business and personal
accounts. This makes it easier to keep records.
For business travel, are there limits on the amounts deductible
Meal expenses are deductible only if your trip is overnight or long enough
that you need to stop for sleep or rest to properly perform your duties. The
amount of the meal expenses must be substantiated, but instead of keeping
records of the actual cost of your meal expenses you can generally use a standard
meal allowance. The amount allowed varies, depending on where and when you
travel. Refer to Publication 1542, Per Diem Rates (For
Travel Within the Continental United States), for per diem rates.
Generally, the deduction for unreimbursed business meals is limited to
50% of the cost that would otherwise be deductible.
For more information on business travel expenses and restrictions, refer
to Tax Topic 511, or Publication 463, Travel, Entertainment,
Gift, and Car Expenses, and Publication 1542, Per Diem Rates .
Where can I find the per diem rates for foreign countries?
The federal per diem rates for foreign locations (outside the continental
United States, abbreviated as OCONUS, and including the per diem rates for
Alaska, Hawaii, Puerto Rica, the Northern Marina Islands, U.S. possessions,
and all foreign locates) are published monthly in the Maximum Travel Per Diem
Allowances for Foreign Areas. Your employer may have these rates available,
or you can purchase the publication from the:
- Superintendent of Documents
- U.S. Government Printing Office
- P.O. Box 371954
- Pittsburgh, PA 15250-7954
You can also access the federal per diem rates for CONUS localities on
the Internet at CONUS. This website
also provides a link to rates for localities.
I use my home for business. Can I deduct the expenses?
To deduct expenses related to the business use of part of your home, you
must meet specific requirements. Even then, your deduction may be limited.
Your use of the business part of your home must be:
- Exclusive (see *exceptions below),
- For your trade or business, AND
The business part of your home must be one of the
- Your principal place of business,
- A place where you meet or deal with patients, clients, or customers in
the normal course of your trade or business, or
- A separate structure (not attached to your home) you use in connection
with your trade or business.
Additional tests for employee use. If you are an employee
and you use a part of your home for business, you may qualify for a deduction.
You must meet the tests discussed above plus:
- Your business use must be for the convenience of your employer, and
- You do not rent any part of your home to your employer
and use the rented portion to perform services as an employee.
Whether the business use of your home is for your employer's convenience
depends on all the facts and circumstances. However, business use is not considered
to be for your employer's convenience merely because it is appropriate and
You do not have to meet the exclusive use test if you satisfy the rules
that apply in either of the following circumstances.
- You use part of your home for the storage of inventory or product samples.
- You use part of your home as a day-care facility.
Form 1040, Schedule C (PDF) filers calculate
the business use of home expenses and limits on Form 8829 (PDF) . The deduction is claimed on line 30 of Schedule C. Employees
claim deduction for business use of home as an itemized deduction on Form 1040, Schedule A (PDF) .
For more information refer to Tax Topic 509, Business Use of
Home, or Publication 587, Business Use of Your Home
(Including Use by Day-Care Providers).
If you lease a vehicle, can you deduct the cost of the lease payments
plus the standard mileage rate?
No, if you lease a car you use in business, you may use either the standard
mileage rate or claim actual expenses, which would include lease payments.
You cannot use both the standard mileage rate and the lease payments.
Are excise taxes for a vehicle deductible?
It has to be a personal property tax, not an excise tax, in order to deduct
it. Deductible personal property taxes are only those based on the value of
personal property such as a boat or car. The tax must be charged to you on
a yearly basis, even if it is collected more than once a year or less than
once a year. To be deductible, the tax must be charged to you and must have
been paid during your tax year. Taxes may be claimed only as an itemized deduction
on Form 1040, Schedule A (PDF), Itemized
If you lease office equipment and machinery with the option to buy,
when do you depreciate the purchase price?
If you lease equipment with the option to later buy the equipment, you
must first determine whether your agreement is a lease agreement or a conditional
sales contract. If, under the agreement, you acquired or will acquire title
to or equity in the property, you should treat the agreement as a conditional
sales contract. Payments made under a conditional sales contract are not deductible
as rent expense. You would start depreciating the equipment on the date you
acquired the equipment.
Whether the agreement is a conditional sales contract depends on the intent
of the parties. Determine intent based on the facts and circumstances that
exist when you make the agreement
In general, an agreement may be considered a conditional sales contract
rather than a lease if any of the following is true.
- The agreement applies part of each payment toward an equity interest that
you will receive.
- You get title to the property upon the payment of a stated amount required
under the contract.
- The amount you pay to use the property for a short time is a large part
of the amount you would pay to get title to the property.
- You pay much more than the current fair rental value for the property.
- You have an option to buy the property at a nominal price compared to
the value of the property when you may exercise the option. Determine this
value when you make the agreement.
- You have an option to buy the property at a nominal price compared to
the total amount you have to pay under the lease.
- The lease designates some part of the payments as interest, or part of
the payments are easy to recognize as interest.
Are business gifts deductible?
If you give business gifts in the course of your trade or business, you
can deduct the cost subject to special limits and rules. In general, you can
deduct no more than $25 for business gifts you give directly or indirectly
to any one person during your tax year. Exceptions may apply. For additional
information, refer to Tax Topic 512 and Publication 463, Travel,
Entertainment, Gift, and Car Expense .
For additional information on this subject see Gifts.
Can I deduct my investment expenses as business expenses?
In order to properly determine the correct treatment income and expenses,
it is first necessary to classify the type of investment activity occurring.
An Investor buys and sells securities solely for their
own account. They are not engaged in a trade or business. An investor's investment
expenses are taken as miscellaneous itemized deductions on Form 1040, Schedule A (PDF), subject to the 2% AGI limitations (with the exception
of investment interest which is not a miscellaneous deduction but subject
to its own special limitations). An investor's sale of securities results
in capital gains and losses.
A Dealer in securities has inventories of securities
that they hold for sale to customers in the ordinary course of their trade
or business. Their business expenses are deductible as ordinary business expenses.
A dealer doing business as a sole proprietor would deduct their expenses on
Form 1040 Schedule C. A Dealer's sale of securities is reported as ordinary
A third classification is Trade. A Trader is in the
trade or business of buying and selling securities for their own account.
You are a trader in securities if you meet all of the following conditions:
- You must seek to profit from daily market movements in the prices of securities
and not from dividends, interest, or capital appreciation.
- Your activity must be substantial.
- You must carry on the activity with continuity and regularity.
The following facts and circumstances should be considered in determining
if your activity is a securities trading business:
- Typical holding periods for securities bought and sold.
- The frequency and dollar amount of your trades during the year.
- The extent to which you pursue the activity to produce income for a livelihood
- The amount of time you devote to the activity.
A trader's business expense are reported on Form 1040, Schedule C (PDF), not as itemized deductions on Form 1040 Schedule
A. The deductions are not subject to the limitations that apply to Schedule
A (2% AGI limitation and special limits on investment interest). A trader
gain or loss on sale of securities is reported as capital gain or loss on Form 1040, Schedule D (PDF) unless they have made the mark-to-market
If a trader has made a mark-to-market election, gains and losses are reported
on Part II of Form 4797 (PDF) as ordinary income.
For information regarding the manner and timing of making the mark-to-market
election, see Publication 550, Investment Income and
Expense or Revenue Procedure 99-17, 1999-1 CB 503.
The proper classification of your investment activities is important to
determine how income and expenses are to be reported. Investors trade solely
for their own account and do not carry on a trade or business. Their securities
sales result in capital gain or loss and their deductible expenses are itemized
deductions. Dealers sell securities to customers in the ordinary course of
trade or business. Their sales result in ordinary gain or loss and their deductible
expenses are trade or business expenses. Traders buy and sell securities frequently
but have no customers. Their purchases and sales result in capital gain and
loss, and their deductible expenses are trade or business expenses.
Even if you engage in extensive securities activities, you are an investor,
not a dealer or trader, if you do not seek profit primarily in swings in daily
market movements, and do not personally engage in or direct the purchases
or sales. An investor trades for profit-motivated reasons such as long-term
appreciation, dividends and interest. Whether the activities of an individual
constitute trade or business or investment is determined from the facts in
each case. These distinctions have been established through court cases.
If your trading activity is a business, your trading expenses would be
reported on Form 1040, Schedule C (PDF), Profit
or Loss from Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF), Itemized Deductions. Your gains or losses,
however, would be reported on Form 1040, Schedule D (PDF), Capital
Gains and Losses, unless you file an election to change your method
If your trading activity is a business and you elect to change to the mark-to-market
method of accounting, you would report both your gains or losses on Part II
of Form 4797 (PDF), Sales of Business Property .
A change in your method of accounting requires the consent of the Commissioner
and cannot be revoked without the consent of the Secretary. Though there is
no publication specific to day traders, the details for traders in securities
and commodities are covered in Internal Revenue Code Section 475 (f) and Revenue
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