Business or Hobby

The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby, that is an activity not engaged in for profit. This is an explanation of the rules that determine if an activity qualifies as a business and what limitations apply if the activity is not a business. Incorrect deduction of hobby expenses account for a portion of the overstated adjustments, deductions, exemptions and credits that add up to $30 billion per year in unpaid taxes, according to IRS estimates. In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.

In order to make this determination, taxpayers should consider the following factors:
– Does the time and effort put into the activity indicate an intention to make a profit?
– Does the taxpayer depend on income from the activity?
– If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
– Has the taxpayer changed methods of operation to improve profitability?
– Does the taxpayer or his/her advisors have the know-how needed to carry on the activity as a successful business?
– Has the taxpayer made a profit in similar activities in the past?
– Does the activity make a profit in some years?
– Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses. If
an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-forprofit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations. Deductions for hobby activities are claimed as itemized deductions on Schedule A (Form 1040). These deductions must be taken in the following order and only to the extent stated in each of three categories:

– Deductions that a taxpayer may take for personal as well as business activities, such as home mortgage interest and taxes, may be taken in full.
– Deductions that don’t result in an adjustment to basis, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
– Business deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

Adapted from www.sba.gov

Exercise 1

Find the words or expressions in the text which mean the following:

1) to figure something out (formally): __________
2) to exaggerate the amount of sth: __________
3) sth that isn’t included: __________
4) to point to sth: __________
5) a company at an early development stage: __________
6) to think that sth is true and correct: __________
7) to balance sth: __________
8) to list sth: __________
9) loss of value: ___________
10)money paid to workers: __________
11)to be more than previously assumed: __________
12)expert knowledge: __________


Exercise 2

Match the expressions from the two columns into logical collocations:

1) a deduction                                 year
2) ordinary and necessary           a deduction
3) to depend                                   premiums
4) circumstances                           expenses
5) to improve                                 profitability
6) a tax                                            of an expense
7) to produce                                  an activity
8) to claim                                      a loss
9) insurance                                   on sth
10)to carry                                      beyond sb’s control


Exercise 3

Provide English equivalents of these expressions:

1) kwalifikować się jako
2) szacunki (założenia)
3) wzrost wartości aktywów
4) działalność niezarobkowa
5) osoba fizyczna
6) spółka
7) kredyt hipoteczny
8) odsetki
9) dochód brutto
10)do poziomu
11)zdarzyć się


Grammar corner…

There is a group of verbs in English that are followed either by „to do sth” or by „doing sth”. Here’s a couple of them that go with either that are worth your knowing.
With „to do sth”: appear, ask, choose, decide, fail. With „doing sth”: advise, avoid, cease, consider, mention. They are often used in business communication, as you will see below.


Exercise 4

Choose the right option.

1) The company appears to be / being in good financial situation.
2) He was asked to leave / leaving due to gross misconduct.
3) The CEO advised to consult / consulting the legal department on the issue.
4) If revenues are as bad as they are now we will cease to pay / paying the salaries.
5) If you choose to sell / selling your stake in the company now, you will lose money.
6) We decided to nominate / nominating you as the CEO – congratulations!
7) The manager avoided to address / addressing the issue at the meeting.
8) Sadly, we failed to reach / reaching agreement, so there’s going to have to be the second round of the negotiations.
9) Have you ever considered to start / starting your own company?
10)He mentioned to cut costs / cutting costs during the meeting.



to determine sth – ustalić coś
to overstate sth – podać wyższą wartość niż rzeczywista
an exemption – wyłączenie
to indicate sth – wskazywać na coś
to presume sth – założyć coś (za prawdziwe)
to offset sth – zrównoważyć coś
to itemize sth – wyszczególnić coś
depreciation – utrata wartości
wages – płace
to exceed sth – przekroczyć coś (np. próg dochodu)
a deduction of an expense – odpis wydatku („wrzucenie w koszty”)
circumstances beyond sb’s control – okoliczności pod czyimś wpływem
profitability – dochodowość
to claim a deduction – ubiegać się o odliczenie od podatku
insurance premiums – składki ubezpieczeniowe
to carry on an activity – prowadzić działalność
to qualify as – kwalifikować się jako
estimates – szacunki
appreciation of assets – wzrost wartości aktywów
not-for-profit activity – działalność niezarobkowa
an individual – tu: osoba fizyczna
a mortgage – kredyt hipoteczny
interest – odsetki
gross income – dochód brutto
to the extent – do poziomu
to occur – zdarzyć się
reasonable – uzasadniony
stake in sth – udział w
gross misconduct – rażące przewinienie
due to – z powodu


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Ex. 1
1) to determine sth
2) to overstate sth
3) an exemption
4) to indicate sth
5) a start-up
6) to presume sth
7) to offset sth
8) to itemize sth
9) depreciation
11)to exceed sth
Ex. 2
1) a deduction of an expense
2) ordinary and necessary expenses
3) to depend on sth
4) circumstances beyond sb’s control
5) to improve profitability
6) a tax year
7) to produce a loss
8) to claim a deduction
9) insurance premiums
10)to carry on an activity

Ex. 3
1) to qualify as
2) estimates
3) appreciation of assets
4) not-for-profit activity
5) an individual
6) a partnership
7) a mortgage
8) interest
9) gross income
10)to the extent
11)to occur
12) reasonable
Ex. 4
1) to be
2) to leave
3) consulting
4) paying
5) to sell
6) to nominate
7) addressing
8) to reach
9) starting