posted on April 13, 2002 08:01:03 PM new
"3 out of 5 years of losses and you will have to convince the IRS why your "business" shouldn't be classified as a hobby."
Quit flogging that tired chestnut. It's not true. The IRS also looks to see if you have a business checking account that keeps business activity funds separate from personal funds or another source of income separate from your business. In my case it's yes to the former and no to the latter.
Any auditor who tried to argue that my business is a hobby would be laughed out of Tax Court.
posted on April 14, 2002 11:28:09 AM new
They're not laughed out of tax court and "businesses" being declared hobbies happens every year.
If you have a personal venture that does not make a profit within the IRS regulations, it is a hobby because your main reason for doing it must not be profit, which is the main element of being classified a business.
If the IRS didn't have these rule, sham businesses would flourish.
I could travel around he world as a "tour guide", and have no customers. Just scouting and getting to know destinations for my "business". I could travel to college football games all over the country scouting prospects as a "sports agent".These would be perfectly legitimate business expences, if it were a bona fide business. The IRS puts the profit regulations in effect to thwart these shams. It is not a matter of intent to make a profit, but you must in fact make a profit in the reporting periods that the IRS allows.
personal business losses are an "above the line" income deduction on a 1040. You could actually run a sham business that produces losses year after year that cancels out your other income. It doesn't make any difference if you have all the receipts or not, if you don't show a profit within the allotted time, you're a hobby.
Corporations are permitted to "lose" money year after year because the corporation may still pay federal taxes even in years that they have no profit. An individual income tax return is filed and calculated in a different manner than a corporate tax return. There is a difference between personal income and corporate profit/revenue.
posted on April 14, 2002 01:47:14 PM new
<<It doesn't make any difference if you have all the receipts or not, if you don't show a profit within the allotted time, you're a hobby>>
If you are saying within the allotted time of profit 3 of 5 years..this is simply not true. That is a guide..it is not the IRS "rule". They are much easier on how you "prove" it within that time frame...but an individual does not have to make a profit 3 out of 5 years, or "suddenly" become a hobby. I'm not talking a corporation..I'm talking an individual. It sometimes takes longer to have a profitable business. Most people who do home secretarial work or DTPing take several years longer to show a profit, because of the equptment they need to purchase.All you have to do, is show your record keeping to the IRS, and if they decide you are in fact a business, you are OK. Does this allow for lots of shams? You bet..I and other preparers have had many clients in the past who I just know are starting up yet another business, just to deduct against their "legit" income. Not much we can do or say, if they come with their records...and not much IRS does either. I assume you are a preparer..you have not seen this, and had a client go through an audit, and win?
posted on April 14, 2002 02:44:05 PM new
The IRS can give a reprieve regarding business staus on an individual basis, they can also declare it a hobby until you make a profit- it's up to them. They also do not have the manpower to audit everyone.
Just because someone has declared personal business losses for 10 years doesn't mean there won't be a problem down the road and a day of reckoning.
There is no limit how far back the IRS can go on your tax returns, if they find reason to do so. A current tax year "problem" can send them back as far as they wish to go.
If you have 5 years of filing losses on a business and get audited, you may be denied business status for a few of those years along will penalties and interest charges.
The IRS has just as much selection on how and against whom they enforce the rules as a prosecutor. Just like traffic cops, some get away with a warning, some get nailed, some just obey the traffic laws and go on their way.
