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From: johnson@saturn.UUCP (Mark Scott Johnson)
Newsgroups: net.taxes
Subject: Re: Employee and A Business Owner
Message-ID: <1933@saturn.UUCP>
Date: Thu, 2-Feb-84 15:24:16 EST
Article-I.D.: saturn.1933
Posted: Thu Feb  2 15:24:16 1984
Date-Received: Wed, 8-Feb-84 03:39:22 EST
Organization: Hewlett Packard Labs, Palo Alto CA
Lines: 31

Yes, business losses can be used to offset other income (even employee salary
when the business is only part-time).  Of course, the IRS takes a dim view
of ANY losses, especially those that offset other gains.

If your business is profitable, the IRS is unlikely to ever question its
legitimacy.  Also, if it's profitable for three (or is it two?) out of five
years, they'll assume it is legitimate.  If it doesn't meet this test, then
you're most likely to have the losses questioned.  There are no hard-and-
fast criteria for what makes a business legitmate, but the business must
be conducted in a "business-like manner" (proper accounting techniques,
licenses if required in your area or trade, etc.), the intent must be to
make a profit (are you investing a reasonable amount of time to the business?),
and you must be qualified to conduct the business (hanging out a shingle as
a "medical consultant" when you don't have an MD is not a good idea).
If the business seem legitimate, there is no limit on how long it shows
a loss or on how big the loss can be and still be deductible.

The IRS is mainly interested in catching people you are trying to
pawn off their hobbies as businesses.  So if what you're doing looks like
a hobby (how many people actually make money collecting stamps or taking
photographs?), you run the greatest risk of being audited.

If you ARE trying to deduct a hobby, I suggest you try making it deductible
as a charitable contribution.  If you like flying your plane, see if there
is some orphanage in Mexico that needs supplies brought down.  If you like
fishing, donate your catch to a soup line.  You can't deduct ALL your
expenses, but you can deduct operating expenses and other out-of-pocket costs.
-- 
Mark Scott Johnson
CSnet:  Johnson@HP-Labs
USENET: ...!ucbvax!hplabs!johnson