Lloyd Conley, MBA, EA, The Woodlands, TX helps taxpayers who have civil issues with the IRS; such as Collections, non-filing, penalties, non-payment, Trust Fund Penalties, payroll tax issues, etc.
Is your business really a business or is it a hobby? Wut?! That’s right. It is possible for the IRS to consider your business to be a hobby for tax purposes. While this issue can be very complicated at times, the basic problem is this. If you are pursuing a for-profit business, you must make a profit at some point. The critical point is often the fourth year. Three years of losses in a row is all you get.
Yeah but, what about a large, long term real estate development project that has five years of losses in a row?! Yep! It has a hobby loss problem! I know that’s not intuitive, but that’s life! There are several important court cases where this issue has been litigated! What’s the big issue? The big issue is that business losses can be carried forward and deducted against profits in future years, minimizing taxation in profitable years. Hobby’s don’t get losses at all! Therefore, no losses are carried forward to offset profitable years! Ouch! That can be expensive … unnecessarily expensive!
What can a business owner do about a project or business like this? How to manage the hobby risk and defend against a hobby determination by the IRS?
There are nine factors that the IRS and the courts will consider when for-profit or hobby is at issue. The business needs a tax advisor who is knowledgeable about each of these nine factors to lay-out a plan. The plan is to:
- Comply with each factor, operating in a business-like manner as prescribed by the IRS.
- Document all relevant transactions from year one throughout the project.
- Have a well documented case showing that at least 5 out of the 9 factors prove the for-profit motive by IRS and court standards.
- Get an annual review of the plan and documentation with an attorney who is knowledgeable in the field.
With this level of proactive preparation, the IRS auditor is likely to agree and approve. If not, the business owner is ready to take his or her case to court with a vigorous defense!
Lloyd Conley EA
10603 W Sam Houston Pkwy N, Ste 225
Houston, TX 77064