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Among the specific provisions of I.R.C. Sec. 162 is the requirement that a taxpayer must incur expenses in the course of carrying on a trade or business in order to be allowed to deduct the expenses. Most cases in which there is a question as to whether a person is actually engaged in a trade or business arise when the participant is involved only part-time or sporadically. In order to be considered to be carrying on a trade or business, a self-employed taxpayer must: begin an endeavor with the intent of making a profit; participate in the venture consistently and significantly; demonstrate a commitment to the enterprise; and, conduct the operation in a business-like manner. The fact that the activity actually generates a loss rather than a profit will not be fatal to its being considered a trade or business, as long as it was started with the intent to make a profit. Commitment to an enterprise may be demonstrated by such things as attendance at seminars or trade shows, taking formal courses to gain expertise in operation of the business, or engaging in any other activity aimed at improving the party’s ability to operate the enterprise profitably. If a purported business activity is determined not to be a trade or business, it will likely be classified as a hobby. The allowable deduction for expenses of a hobby is limited to the amount necessary to offset gross income from the activity, thereby eliminating the deductibility of any losses generated by the venture. (A detailed discussion of the factors that determine whether an activity is considered to have been engaged in for a profit or must be considered a hobby for tax purposes, as well as the tax consequences of such a determination) It is common for self-employed taxpayers to have jobs as employees and carry on separate self-employment activities in order to supplement their wages or salaries. The fact that a taxpayer works as an employee for another party will not prevent the worker from being allowed to take deductions associated with a separate trade or business that is conducted on a selfemployment basis. However, the worker must maintain separate accountings for expenses associated with his or her employment and those associated with his or her self-employment income. The worker must also limit the deductions taken against self-employment income to those associated with the self-employment activity.

 

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