Managing an IRA is a business?

Q. I will be self directing an IRA to generate income. I will need a computer, software, attending investing seminars, and a host of other expenses in order to self direct it. Can any of these be business deductions?

A. Wouldn’t it be nice if we could get paid for every activity that we undertake.  I think that producers should pay me for the privilege to eat their food.  I think manufacturers should pay me to wear their clothing.  Unfortunately, that is not the way the world works.

The IRS is very specific regarding what can be considered a business and what is undertaken as a hobby.  In your case, unless you intend to offer the service of IRA management to clients, you are performing a useful task that certainly benefits yourself.  It simply does not appear to be a business.  Therefore, none of the items would be considered business deductions.

What is the difference between a business and a hobby?  The IRS has some very good documentation on IRS.gov that explains this.  One good article can be found here: http://www.irs.gov/irs/article/0,,id=186056,00.html.  The following quick checklist is found in that article and can help you make the decision:

• Does the time and effort put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Do you expect to make a profit in the future from the appreciation of assets used in the activity?

The investment classes you take may be claimed under the Lifetime Learning Credit if they are given through a school that provides scholarships and true grades.  Most investment seminars are given by an individual and would certainly not qualify.

Of course, for specific guidance (since I do not know all the facts of your case) feel free to ask your tax adviser or CPA regarding their opinion of this activity in which you wish to participate.

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