BroccoliFarmer
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Agreed on your hypothetical. Hence why the time spent is one of the rules. In your hypothetical situation, it is obviously a business because you have hired someone that will spend the time and it has a clear profit motive. This is why there are a number of tests and it is a preponderance of the evidence approach, whereas time spent is one of them. The situation that your hypothetical situation would be a problem would be the passive activity loss rules...since you personally did not spend a reasonable amount of time (as defined as 500 hours under the PAL rules), you would not be able to take losses until such a time that you either had passive activity gains or exited the business.I'm still unsure of any time limit. Hypothetical: I once almost bought an apartment building. I was going to have it professionally managed. I would have deducted operational expenses for that, even though I might only spend a hundred hours a year managing it...
I also had a tax advisor tell me that there is an unwritten rule out question - is the activity something people do for fun? That will make it a hobby. That's why comic book collectors, photographers and reef aquarists all may have a challenge showing that what they do isn't a hobby. Snow plow operators have an easier time of it, few people do that for fun (grin).
Jay
To your second point..is someone doing it for fun...that goes to the profit motive. Is the primary purpose of the venture for fun and the secondary is you make income or is the primary motive profit.
The big point about these rules are the fact that irs doesnt want people writing off their fish tank, salt, electrity, etc because they happened to sell a piece of coral for $10 but get to write off a few thousand off their taxes. As such, they wrote some guidelines that are generalities. As I stated above, hard and fast rules are easier to get around whereas guidelines give IRS auditors to step back and try to determine actual situation.