Taxes Made Simple

Carol (sole proprietor) asks:

I run a clothing business out of my home making tailor-made wedding dresses. I just recently learned about hobby loss rules, and I'm a little worried. How can I keep the IRS from deciding my business is just a hobby? 

Answer: 

It's important that the IRS agrees with you that the activity you're engaging in is, in fact, a business rather than a hobby.  If they decide that it's really a hobby, you're going to miss out on many important deductions.  The following are all things that will increase the likelihood the IRS regards your business as a business:

1) You carry on the activity in a businesslike manner. (That is, you have business cards, official letterhead, etc.)
2) The activity has a tendency to earn a profit for you.
3) You make changes to your operations in order to improve profitability.
4) You put sufficient time and effort into the activity to indicate that you intend to make it profitable.

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