Is it a trade or business?

A trade or business has been defined as “holding one’s self out to others as engaged in the selling of goods or services.”

The Small Business/Self- Employed section of the IRS Web site at www.irs.gov defines it as “an activity carried on for a livelihood or in good faith to make a profit.” Revenue Ruling 58-112 further characterizes a trade or business activity as one that is regular, frequent and continuous. The regularity of activities and transactions and the production of income are important elements. They must, moreover, make ongoing efforts to further the interests of the business.  If the activity meets these criteria, then the income (and expenses) should go on Schedule C.

In most instances, if the nature of the earnings does not appear to constitute a trade or business, the tax preparer can make a case for reporting the earnings as other income and therefore avoid the cost of self-employment tax.

Some examples of income that would not be deemed as an ongoing business, and therefore not be put on Schedule C but on Other Income:

  • A taxpayer is paid by an ill and homebound neighbor to assist with daily activities one day per week.  The TP isn’t in the business of doing this work and doesn’t perform this type of work anywhere else.
  • A taxpayer walks the dog for a friend once per day.  The TP doesn’t promote herself as being in this business, doesn’t attempt to grow and sustain it as a business, doesn’t consider “dog walking” as her occupation.
  • A taxpayer did odd jobs and household work for someone a few times during the year.
  • it is a payment reported by an agency for care of a family member (unless in that business, then use Schedule C).
  • the recipient is a newspaper carrier under age 18.