Layering is the Key
A hobby business is one which is not formally organized. By IRS rules a business must be in business to make a profit. It must have a profit motive and a profit incentive. To prove this, in many cases, a business should be organized, using a formal structure with an EIN, not using your social security number. It is also advisable to use a business name which is not your own. Recently we had a man and wife come to us, asking us to help with a tax issue. The man had filed his own taxes and had declared nearly $25,000 in business research expenses – travel, research, etc. The IRS disallowed those expenses and sent him a bill for $8,000 in taxes due. The reason – The man and wife couldn’t prove they were in business to make a profit. In fact, they couldn’t prove they even prove they had a business. Using a formal organization is some proof of your profit motive. Without it many allowable deductions will go unclaimed.