          
          
          
               DON'T LET THE IRS CALL YOUR BUSINESS A HOBBY
          
               The IRS often tries to eliminate the tax benefits
          of a sideline activity by arguing that it is a hobby,
          not a business.  If the IRS declares your sideline
          business a hobby, you can't deduct any more than you
          make on the hobby. 
               In effect, then, your sideline business income can
          be tax-free, but you will not be able to deduct non-
          cash expenses such as depreciation.  And you won't be
          able to use the business to lower your family's overall
          taxable income.
               There are several ways to avoid having a sideline
          business treated as a hobby.  The tax code provides a
          "safe harbor" rule.  If you profit from a sideline
          three out of any five consecutive years, you're safe. 
          (If you breed horses, the safe harbor rule is three
          profitable years out of any seven consecutive years.)
               Taxpayers who don't qualify for the safe harbor
          rule still have hope.  You have to make a case for the
          fact that you are trying to be profitable.  Some
          documentation that will help is proof of advertising,
          promotion, proposals, market research, and the like. 
          Save your rejection letters. 
               Two recent court cases established pro-taxpayer
          decisions on this issue.  In each case, the taxpayer
          never made a profit, but the sideline still qualified
          as a business.  According to the courts, the most
          important factor is that you conduct your sideline
          business in a professional manner.  If you take it
          seriously, the courts may take it seriously. 
               Find out what either the industry or the local
          norm is for all your business procedures.  Follow the
          norm unless you have a more effective way of doing
          things.  And always keep complete records.
          
          
          
