Discussion:Hobby vs Business
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Discussion Forum Index --> Basic Tax Questions --> Hobby vs Business
Discussion Forum Index --> Tax Questions --> Hobby vs Business
| 15 October 2009 | |
| My client hasn't made a profit on his business for the last four years. He has a "home office operating loss carry forward" from 2007 which will guarantee that he won't show a profit for years to come, assuming that his income & expenses remain about the same. Without using that carry forward, he will show a profit on the 2008 tax return. Is it likely that the IRS would see that the business would be profitable if it weren't for the carry forward? Or is it more likely that the IRS would simply look at the fact that the client continues to show no profit and he would eventually be targeted for an audit? I have provided the client the IRS publication differentiating hobby vs. business and he is convinced that his activity would qualify as a business if he were audited. However, he doesn't want to be audited by the IRS since he would have to pay me to represent him. Any thoughts on this issue? | |
| 15 October 2009 | |
| "...he is convinced that his activity would qualify as a business if he were audited. However, he doesn't want to be audited by the IRS since he would have to pay me to represent him."
If he is familiar with the nine criteria and has that high of degree of certainty, it is his call. Form 5213 might come into the picture if in fact he does hear from them - think 60 days to file after notified. | |
| 15 October 2009 | |
| This guy doesn't want to pay you to handle an audit, but he wants to do things that may get him audited. Carry on.... | |
Death&Taxes (talk|edits) said: | 15 October 2009 |
| If his business efforts are legitimate, and not simply some personal whim, I believe he would have little to fear, especially if revenues have grown. The idea that IRS has a person sitting there tracking losses sounds fallacious; when a return is selected for audit, they ask you to bring in prior years as they don't have copies on hand. | |
| 15 October 2009 | |
| he could also stop doing this unprofitable activity and go get a job | |
| 15 October 2009 | |
| What job? Medical office assistant? We probably got 14% unemployment if you count the people who've stopped looking.
As long as his marketing/advertising expenses are in line, he shouldn't have any problems in this economy, but for him to say that he's trying to be so careful that he won't get audited is rather ridiculous under the circumstances. | |
| 15 October 2009 | |
| the guy at McDonalds is making more than this guy, though. If there is no light at the end of the tunnel, don't keep going further into the tunnel.
You know what a rut is, don't you? A grave with both ends kicked out. | |
| 15 October 2009 | |
| The OP is too scanty on details - as usual. If there is a large depreciation factor in addition to the home office, there might be a good cash flow which then should present no problem. | |
| 15 October 2009 | |
| The big question is are the losses from this business offsetting income from other sources? If not the IRS may not care quite so much. The ones I worry about are the couples were one earns $400k and the other has an art/photography/music/horse/yoga business that never seems to turn the corner to profitability. | |
Death&Taxes (talk|edits) said: | 15 October 2009 |
| Read Stella Waitzkin v. Commissioner, T.C. Memo. 1992-216 and then Google Stella Waitzkin. That was 1992 and look at her today.
Photographers often lose money for a number of years while building a reputation, and before the days of digital photography, would spend prolifically on equipment. Some have full time jobs with publications, while others have generous spouses. This month I lost a long time friend and client to the Reaper. http://www.legacy.com/obituaries/philly/obituary.aspx?n=harry-sefarbi&pid=133707968 This man had his greatest successes when he reach 75 and beyond, but I fear many on this board would have not given him the benefit of the doubt in his formative years. The first place I look when I see such a person is their 'curricula vitae'. | |
| 15 October 2009 | |
| That would be my luck, reach my greatest success at 75 or beyond, and keel over before I could make it to the bank to deposit the check (or be too old to spend the money). | |
Death&Taxes (talk|edits) said: | 15 October 2009 |
| But, just so you don't think I do taxes with my hair on fire, I am disturbed by the OP's statement that the man doesn't want to pay to be represented. Sounds like he has no belief in his business. | |
| 15 October 2009 | |
| I am not saying that these "loss" businesses aren't legit but if there is no other income it isn't lowering anybody's taxes. | |
