Is The Activity Carried on In a Business-like Manner? Maintenance of complete and accurate records for the activity is a definite plus for a taxpayer, as is a business plan that formally lays out the taxpayer’s goals and describes how the taxpayer realistically expects to meet those expectations.

How Much Time and Effort Does the Taxpayer Spend on The Activity? The IRS looks favorably at substantial amounts of time spent in the activity, especially if the activity has no great recreational aspects. Full-time work in another activity is not always a detriment if a taxpayer can show the activity is regular; time spent by a qualified person hired by the taxpayer can also count in the taxpayer’s favor.  

Does The Taxpayer Depend on The Activity for a Source of Income? This test is easiest to meet when a taxpayer has little income or capital from other sources (i.e., the taxpayer could not afford to have this operation fail).

Are Losses from The Activity the Result of Sources Beyond The Taxpayer’s Control?, Losses from unforeseen circumstances like drought, disease, fire, etc., are legitimate reasons for not making a profit., The extent of losses in a start-up phase of a business also needs to be looked at in the context of the kind of activity involved.

Has the Taxpayer Changed Business Methods in Attempts to Improve Profitability?, Document efforts of the taxpayer to turn the activity into a profit-making venture.,

What Is the Taxpayer’s Expertise in the Field?, Extensive study of this field’s accepted business, economic, and scientific practices by the taxpayer before entrance into the activity is a good sign that profit intent exists.,

What Success Has the Taxpayer Had in Similar Operations?, Document how the taxpayer turned a similar operation to a profit-making venture in the past.

What Is the Possibility of Profit? Even though losses might be shown for several years, the taxpayer should try to show that there is realistic hope of a good profit.

Will There Be a Possibility of Profit from Asset Appreciation? Although profit may not be derived from current operations of an activity, asset appreciation could mean the activity will realize a large profit when assets are disposed of in the future. However, the appreciation argument may mean nothing without the taxpayer’s positive action to make the activity profitable in the present.