Frequently Asked Questions

What is a business?
What can I deduct as a business expense?
Can I deduct expenses for my home office?
Can I deduct my business losses?

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What is a business?

According to the Internal Revenue Code “An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity.”

This
What can I deduct as a business expense?

This is a wide open area in the tax code. The basic definition is, “it is deductible if it is considered ordinary and necessary for your business.”

Starting in 1999
Can I deduct expenses for my home office?

Starting in 1999, it is easier for taxpayers to qualify a home office as their “principal place of business” for purposes of deducting the expenses of a home office due to the repeal of the Soliman case in TRA 97. Specific tests must be met to claim the home office deduction. Click here for all the details.

The answer
Can I deduct my business losses?

The answer here could be either yes or yes but maybe not this year. Congress has enacted a material participation rule. You must be able to pass the material participation test as follows: 1. You participated in the activity for more than 500 hours during the tax year, 2. Your participation in the activity for the tax year was substantially all of the participation in the activity of all individuals (including individuals who did not own any interest in the activity) for the tax year. 3. You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other person for the tax year. This includes individuals who did not own any interest in the activity. 4. The activity is a significant participation activity for the tax year, and you participated in all significant participation activities for more than 500 hours during the year. An activity is a “significant participation activity” if it involves the conduct of a trade or business, you participated in the activity for more than 100 hours during the tax year, and you did not materially participate under any of the material participations tests (other than this test 4).

If you fail the material participation tests and you have business losses they will be considered passive losses which can be used against passive income or if no other passive income is available to offset these passive losses then they will carryover to a future year and used when you do pass the material participation tests.