The manner in which the taxpayer carries on the activity:                                                               i.      Is the activity operated in a businesslike manner? Does the taxpayer maintain complete and accurate books? Budgets and financial projections are helpful.                                                               ii.      Is the activity carried on in a manner similar to profitable activities of the same nature? Does the taxpayer: 1.      Attend classes to improve skills? 2.      Subscribe to professional magazines?   The expertise of the taxpayer or the taxpayer’s advisors:                                                                 i.      Did the taxpayer prepare for the activity by extensive study of accepted business, economic, and scientific practices; or                                                             ii.      Did the taxpayer consult with those who are experts? The taxpayer should follow the preceding advice unless it appears taxpayer is attempting to develop new or superior techniques, which may result in profits from the activity.   The time and effort spent by the taxpayer in the activity:                                                               i.      Is the taxpayer devoting substantial time to the activity? If not, does the taxpayer employ competent and qualified personnel? The taxpayer does not have to personally perform all the services, but the underlying activity has to require involvement.                                                             ii.      Did the taxpayer withdraw from another occupation to devote more time to the activity? This may be evidence the activity is engaged in for profit.   Is there an expectation of the appreciation in asset values?                                                               i.      Appreciation in land value is part of the profit motive.                                                             ii.      Appreciation in other assets is greater than all losses you have deducted.   Has the taxpayer been successful in other business activities?                                                               i.      Has the taxpayer previously converted similar businesses from unprofitable to profitable enterprises?   The history of income or losses for the activity:                                                               i.      Are the losses as a result of normal start-up costs?                                                             ii.      Continued losses due to customary business risks may indicate the activity is not being engaged in for profit. Possible exceptions include drought, disease, fire, theft, weather damages and depressed market conditions                                                           iii.      TIP: After continued losses, you should implement some operating changes to show your intent is to make a profit. Otherwise, it appears you are willing to continue with losses for personal reasons.    The history of any earned profits in relation to any losses:                                                               i.      What about in relation to the amount of the taxpayer’s investment?                                                             ii.      Occasional small profits from an activity generating large losses generally are not determinative that the activity is  engaged in for profit.    What is the financial status of the taxpayer?                                                               i.      Substantial income from other sources may indicate an activity is not engaged in for profit. The courts will look critically at losses that generate significant tax savings for the taxpayer.                                                             ii.      Does the taxpayer rely on the income from the activity?    Is there an element of personal pleasure or recreation?                                                               i.      More than any other test, this gets the closest IRS scrutiny. Many of the cases revolve around quasi-recreational activities.                                                             ii.      Presence of personal motives may indicate that the activity is not engaged in for profit.                                                           iii.       Lack of appeal other than profit will help.                                                            iv.      Not necessary that activity be engaged in with the intention of maximizing profits.                                                              v.      Fact that taxpayer derives personal pleasure from engaging in activity is not sufficient to cause the activity to be classified as a hobby.   TRADE OR BUSINESS CHECKLIST TRADE OR BUSINESS CHECKLIST Yes NO NA 1. Does the taxpayer carry on the activity in a business-like manner?       2. Does the taxpayer and/or his advisors have the required expertise in the activity?       3. Does the taxpayer devote sufficient time and effort to the activity?       4. Are asset values appreciating (or expected to appreciate)?       5. Has the taxpayer been successful in other business ventures?       6. Is there a reasonable explanation for a string of years with losses?       7. If there are occasional small profits but lots of large losses, is there any anticipation of change in the pattern?       8. Is the activity the primary source of income for the taxpayer?       9. Does the activity seem to be more business than pleasure or recreation?       10. Are there any other factors indicative of a business as opposed to a hobby?         Notes: A “yes” answer suggests a favorable response. A “no” answer suggests an unfavorable response. Remember this is a facts and circumstances test and no one item is controlling.