About this Book

What is a business? This seems like a pretty straightforward question, one hardly worth spending any time on at all. But, in fact, it is absolutely the first question to ask when you’re starting up, and essential for getting started on the right foot.

You may find this statement surprising, but it is observed that the US Revenue Agency and the typical American taxpayer do not always agree! A key area of disagreement concerns the question “What is a business? In fact, the US Revenue Agency (RA), the courts and taxpayers have been arguing a lot about what is and what is not a business over the past few decades.

What would seem to be a straightforward question has been a very difficult fundamental question to answer.

And the problem has historically come about because RA does not want to allow a taxpayer to deduct losses year over year in a questionable business. As a result, in the past, the tax department considered a business to be any activity that you conduct for a profit or a reasonable expectation of a profit. If the business could not demonstrate that it could become profitable, RA would deny the losses. On May 23, 2002, the Supreme Court of USA ruled on two cases, Stewart v. The Queen and the Queen v. Walls, which changed all the rules.

As a result of the Supreme Court of USA’s decision, RA now only considers the concept of “reasonable expectation of profit” if there is a personal element with respect to your business. If there is no personal or hobby element and assuming of course your business is not a sham, then URA will generally no longer question whether or not you are in fact in business.

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