In order to be able to deduct all your business expenses, you must engaged in a "trade or business;" an activity that is for profit.

According to the IRS, to constitute a trade or business, a profit motive must be present (though you may in fact have experienced a loss for the year) and some type of economic activity must be conducted. "Profit" in this context means that you are aiming to achieve a real economic profit, not just tax savings.

There are several issues you may face in determining whether your activities are really a business under the IRS's rules:

• Are you running a business, or will the IRS treat you as pursuing a hobby that generates some income?
• Do your activities constitute one business, or should they be treated as two or more businesses or other activities?
• How is your business identified for tax purposes?
• Did you materially participate in the business, for purposes of passive activity rules?
• What is your tax year and what accounting method do you use?