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Originally Posted by Dunbar
A professional gambler can be in the "business" of gambling, with no obvious "good or service" produced. That is, the IRS will accept a Schedule C filing from a professional gambler if certain conditions are satisfied, so the "good or service" requirement is not absolute.
I don't know a thing about how they handle racehorse ownership, however.
--Dunbar
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Schedule C. Unfortunately for the self-employed, just filing Schedule C may be the biggest red flag of all. Consider these figures. Normally, if you earn between $50,000 and $100,000, your chance of being audited is about one in 100. File schedule C, with about the same income, and the odds nearly double to a frightening one in 50. "If you're self-employed, it's very hard to avoid an audit," says Renn. "It's almost guaranteed that if you file Schedule C long enough, you'll get audited."
Experts agree that the IRS carefully scrutinizes Schedule C. Among the agency 's favorite red flags here: A too-small bottom line. A large discrepancy between gross and net income may arouse suspicions of expense padding or improper deductions. The IRS is particularly likely to challenge travel and entertainment expenses and home offices (more on this below), so make sure your documentation is good.
Running in the red - a negative bottom line - is a sure attention grabber, particularly if it continues for several years. Generally, if your business loses money three (or more) out of five consecutive years, the IRS will assume it's just a hobby. In that case, you can deduct expenses only up to the amount you earned. This doesn't mean that you can never take a deduction for a persistent money loser - but the onus is on you to prove that it's a legitimate business. Di Re suggests fortifying your case with a business plan, careful records, and business bank accounts separate from your personal accounts. "Do everything in as business-like manner as possible," Di Re advises