The IRS Considers Your Business to be a Hobby

I was forwarded this fascinating article on Amway businesses and how they have fared in tax courts when it comes to justifying deductions as business expenses. The whole article is too long to re-print here, but read Peter’s post and come back with your comments.

What I do want to highlight were the numerous cases where the tax courts deemed that expenses related to attending Major Functions were not allowed because these events were primary social gatherings. Yup, that’s basically what Major Functions, Monthly Opens and House Meetings amount to. You get together with a bunch of “friends” and talk about the same thing over and over. Is there any actual business happening? Are you selling products in order to make a profit at these meetings?

Taxpayers weren’t entitled to deduct business loss related to Amway distributorship: taxpayers didn’t engage in activity for profit. Expenses of distributorship activity related mainly to social functions: taxpayers attended seminars in Colorado and California, and monthly dinners with their “network”; taxpayer-husband took guest who was interested in finding out more about distributorship on fishing trip; and “supplies” expense included groceries bought while taxpayers were away delivering products or visiting clients.

For people who have been losing money year after year, while still deducting “business expenses” on their tax forms, be careful. You may find that your business is really just a hobby.