Schedule C

[HV Ken]

I seem to recall something along the lines that when it comes to Schedule C self employment income, there was some rule/test that it needed to show a profit in 2 out of 5 years, otherwise it was considered a hobby and treated differently. I did some searches, but could not locate anything in an IRS publication that actually states this.

Is there a reference to such a stipulation ?

Thanks for any help / insights.

[TAXBILLY]

http://www.irs.gov/irs/article/0,,id=186056,00.html

taxbilly

[imjulier]

The 2 out of 5 years rule is a "safe harbor provision" that the IRS will look at if the particular return is audited. It is not a hard and fast rule. There needs to be a profit motive though so the business can't be engaged in to specifically create a loss to offset other income. Example might be a photography business when the taxpayer is fully employed by someone else and really doesn't spend much time on the photography business. Marketing expenses can also show profit motive. I'd talk with the client about their profit motive and if they seem to have it, let it go and claim losses for many years if necessary.

Julie