Do You Have To Show A Profit?

Part-Time Photographers And The Profit Picture

The SBA (Small Business Administration) has noticed explosive growth of Work-At-Home businesses in the last decade. This can be attributed in part to the ease of start-up that the computer revolution has fostered.

Frequently, new sole proprietors come to me with the question, "What if I don't make a profit?"

If your photography business is part-time, and you have a salaried job elsewhere, the IRS will accept that your photography is a business rather than a hobby, if you have a net profit in any three out of the last five consecutive years. (It's two out of seven years if you are involved in the breeding, training, showing or racing of horses). Full-timers, don't be confused here. If you are engaging in your photography full-time, and your intent is to make a profit, you can go for decades with showing a profit.

So, back to part-timers, not to worry when you have at least three profitable years during the last five. If you can satisfy that stipulation, you are entitled to fully deduct your expenses each year, even if it is a loss year.

If you have yet to meet this requirement, you should take steps now to either boost your income from your stock photography or decrease your expenses. Otherwise, you risk forfeiture of your expenses. Moreover, if you can arrange this year to be your third profitable year out of four, you will safeguard your deductions for next year, your fifth year.

What if you have red ink in more than two out of five years? A much-misunderstood point is that flunking the three-out-of-five test is not fatal. This holds true if you conduct your affairs in a businesslike fashion.

In next month's column, I'll discuss some of the extenuating circumstances you may be eligible for.