Tax Musings of a Burbank CPA – Is Your Business Really a Business or a Hobby?

Now that tax season is over, I want to discuss the hobby loss rules a bit.  Is your small business really a business or is it a hobby (with the loss of any corresponding tax losses). The IRS has addressed the issue with a list of factors they use to determine if a business is a hobby or not.  Here is the list from the IRS website: Income & Expenses Question: How do you distinguish between a business and a hobby? Answer: In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. No one factor alone is decisive. You must generally consider these factors to establish that an activity is a business engaged in making a profit: Whether you carry on the activity in a businesslike manner. Whether the time and effort you put into the activity indicate you intend to make it profitable. Whether you depend on income from the activity for your livelihood. Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business). Whether you change your methods of operation in an attempt to improve [...]

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Financial Musings of a Burbank CPA: Letting your investment winners run and protecting your downside Part 5 (The Final Chapter)

This article concludes my five part newsletter series I published a couple of years ago on investments – Letting Your Winners Run and Protecting Your Downside. Part 5 0f 5 – How It All Works Together (The Final Exciting Chapter): Okay, now how does this all work together? First, select the investments you want, making sure you diversify between assets and across industries. Now pick somewhere between 20 and 25 investments and put equal amounts in all of them (keeping position sizes between 4 and 5 percent of assets.) Keep track of your stop losses – about 15% to 25% of the investment. The worst case situation – an investment drops below your stop loss. If you follow your stop and sell at the open the next day, with the position size of 4-5% your worst loss will be around 1 to 1 1/2% percent of your assets. A few of these will probably hurt a little, but you have small losses to deal with rather than big ones. If a couple of investments take off, you can let your winners run, using the stops to stay in the investment and then tighten your stop loss and when you sell you will [...]

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Financial Musings of a Burbank CPA: Letting your investment winners run and protecting your downside Part 4 of 5

This article continues my five part newsletter series I published a couple of  years ago on investments – Letting Your Winners Run and Protecting Your Downside (this stuff never gets old!) Part 4 0f 5 – The Trailing Stop Loss: Ok, you are in your investments; now when should get out of them?  The answer is the trailing stop loss. When you buy an investment, set a stop loss of 15 – 25% of the investment value; if the asset drops that amount, you sell on the market opening the next day (this will prevent a sudden drop in price and rebound, called a whipsaw, taking you out of an investment by hitting your stop loss then rebounding back above – wait until the close and see if you are still below your stop. Also it is not a good idea to log your stop losses in with your broker as they will be automatically exercised instead of waiting for the close; keep them in your head or on a spreadsheet.)  The 15 – 25% stop loss will keep you in the trade long enough to give the investment time to become profitable without stopping out too soon. The reason to [...]

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