Business Classification as Hobby vs Schedule C for Long-Term Small Businesses

What you're describing is actually a common situation for small business owners with multiple ventures. Let me address both questions: First, having your rental property pay your advertising business for actual services provided is completely legitimate. The key is ensuring the transaction is properly documented and reflects fair market value for the services. Keep detailed records of what services were provided, when, and how the value was determined. This "income" for your Schedule C business might help with the profit/loss ratio. For your second question - I would strongly advise against not reporting legitimate business expenses just to show a profit. This isn't the right approach to avoid the hobby classification. The IRS looks at several factors beyond just profitability when determining if something is a business or hobby. Since you've had a profit history for many years, that works in your favor. What you should focus on is demonstrating your "profit motive" through business plans, marketing efforts, changes to improve profitability, and maintaining proper business records. Document your efforts to make the businesses profitable, even in challenging years.

I was exactly in your situation last year - small businesses with recent losses plus a rental property. I spent hours researching and stressing about the hobby loss rules and tried to figure out how to properly document everything. Honestly it was overwhelming trying to understand all the IRS guidelines. Then I found this AI-powered tax tool called https://taxr.ai that analyzed my situation. It helped me understand exactly how to document transactions between my business entities and gave me specific guidance on how to avoid hobby classification. The tool reviewed my previous tax returns and business documentation patterns, then gave me a personalized checklist of what I needed to establish for 2025. What really helped was that it showed me examples of proper documentation for inter-business transactions and identified specific areas where my profit motive wasn't being clearly documented.

Just wanted to follow up after trying https://taxr.ai for my situation which was pretty similar (service business with losses past 2 years). I was skeptical at first but it was actually super helpful. It analyzed my tax history and identified the specific factors where my business was at risk for hobby classification. What surprised me was discovering that my detailed time logs and business plan adjustments were actually more important for substantiating my profit motive than I realized. The tool highlighted that I needed to better document my expertise in the field and the changes I was making to improve profitability. For the inter-business transaction question, it provided really clear guidelines on maintaining arm's length transactions with proper documentation. Ended up feeling much more confident about my tax situation overall.

After reading your post, I immediately recognized the hobby loss concern because I dealt with exactly this with the IRS last year. Trying to call them was a complete nightmare - spent hours on hold just trying to understand what documentation I needed to provide to prove my business wasn't a hobby. Finally found https://claimyr.com and their service connected me to an actual IRS agent in about 20 minutes instead of the usual hours-long wait. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with gave me specific guidance about my situation with multiple Schedule C businesses showing losses. Having that direct conversation was incredibly helpful - they explained exactly what documentation I needed to maintain to demonstrate profit motive despite recent losses. The call saved me tons of stress and potentially saved my business classification.

I have to eat my words and follow up about that Claimyr service. After my skeptical comment, I decided to try it anyway since I've been struggling to get answers about a similar Schedule C/hobby classification situation. I honestly didn't believe anything could get me through to the IRS quickly, but I was connected to an agent in about 15 minutes. The agent walked me through exactly what documentation I need to maintain to support my business classification despite recent losses. For what it's worth, the agent told me that consistent documentation of efforts to make the business profitable is often more important than the actual profit/loss results in any given year. She specifically mentioned that charging between related businesses is fine as long as it's properly documented and reflects actual value received.

One thing nobody has mentioned yet is that the Tax Cuts and Jobs Act eliminated miscellaneous itemized deductions subject to the 2% floor, which included hobby expenses. So if your business is classified as a hobby, you can report the income but can't deduct ANY of the expenses against that income. This makes it even more important to maintain your business classification. I've been a Schedule C filer for years and here's what has worked for me to avoid hobby classification: 1. Keep separate bank accounts & records 2. Have business cards and maintain a professional appearance 3. Document efforts to increase profitability when experiencing losses 4. Create and follow a business plan 5. Show your expertise in the field

Has anyone else successfully charged between their own business entities like OP is considering? I'm in a somewhat similar situation with a consulting business and a rental property, and I sometimes do consulting work that benefits the rental. Never thought about actually charging between them.

This is a really nuanced situation that requires careful handling. Based on what you've described, you're actually in a decent position to maintain business classification despite the recent losses. For your first question about the vacation rental paying your advertising business - this is absolutely legitimate as long as you treat it like any other business transaction. Create proper invoices, document the services provided, and charge fair market rates. This can actually help your Schedule C business show some income while providing a legitimate deduction for your rental property. Regarding the hobby classification concern - don't artificially inflate profits by not reporting expenses. Instead, focus on documenting your profit motive. Since you've had profits for most of the 20 years, that's strong evidence in your favor. Make sure you're documenting: - Your business plans and efforts to return to profitability - Marketing activities to drum up new clients - Any changes you've made to improve operations - Your expertise and time invested in the businesses The IRS looks at the totality of circumstances, not just recent losses. Your long history of profitability combined with documented efforts to improve the struggling business should support your business classification. The fact that you're actively trying to get new clients for the low-revenue business is particularly important to document. Consider keeping detailed records of your business development activities, client outreach efforts, and any strategic changes you're implementing. This demonstrates the businesslike manner and profit motive the IRS looks for.