The tax law has a number of provisions that have different results depending on whether the subject is viewed as a business or as an investment. The words "business" and "investment" have particular meanings in tax parlance even though we look at putting money into any type of business as an investment.

Here are some situations in which distinctions matter:

Bad debts
If you loan money and aren't repaid, how you treat your loss depends on whether the debt is viewed in tax law as a business bad debt or a nonbusiness bad debt. A business bad debt is fully deductible and needs to become only partially worthless. A nonbusiness bad debt is treated as a short-term capital loss (regardless of how long the loan was outstanding), which can be deducted only to the extent of capital gains and a limited amount of ordinary income each year with excess losses carried forward. The debt must be fully worthless (noncollectible in any amount).

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