The IRS makes the presumption that an activity is a business and established to make a profit if it has made a profit in, at least, three of the prior five years. The business must be substantially the same during this time period. If a business fails to make a profit, the IRS may review a taxpayer’s business activities to determine whether it’s a legitimate “for-profit” enterprise and, therefore, a business. When an activity is treated as a business, taxpayers have the ability under the Internal Revenue Code to make more deductions from income and pay fewer taxes.
As a result, some taxpayers may want to postpone the IRS making any determination whether the purpose of an activity is for profit. Taxpayers may make an election that allows more time to make a profit, and, therefore, be considered a business by the IRS.
To help establish that an activity is a legitimate business enterprise for tax purposes, taxpayers may conduct certain business practices that indicate the intention to make a profit and the legitimacy of the activity as a true business enterprise. These include the following:
- Registering the business with the State of Georgia as an LLC or partnership;
- Complying with all local, state, and federal tax laws, including sales tax, annual business renewal fees, and franchise taxes;
- Opening and maintaining operating accounts for the business;
- Maintaining a record-keeping system for the business;
- Separating business and personal expenses;
- Operating a business website; and
- Having regular business hours.
This election must be made within three years after the due date of the return for the first tax year of this activity. Thus, if a business began operations in January 2019, this election should be made before the end of 2021. The determination is postponed for the 4th tax year after the tax year in which the taxpayer first engaged in the activity. If the activity consists mainly of breeding, training, showing, or racing horses, the determination is postponed for the 6th tax year after the tax year in which the taxpayer first engaged in the activity
If you engage in an activity for profit and have questions about whether it is a business for income tax purposes, call the Gartzman Law Firm at (770) 939-7710. An Atlanta tax attorney who is experienced in handling business-related tax cases can help you take all the necessary steps so that your activities are treated as a business and you can take advantage of all the deduction permissible by law. The Gartzman Law Firm handles all types of tax cases. Use our contact form to request a consultation with an Atlanta tax resolution attorney.