Your hobby profit and loss situation may be your tightly-held secret, but the IRS knows how to get into your business. Literally! The more secret something appears, the more red flags the IRS sees.
Hobby profit and loss often goes unreported
High-income professionals often have hobbies which generate income and provide an avenue for rest, regeneration and fun with blue skies and solitude. Operating a hobby business which loses money isn’t necessarily illegal and its not uncommon for taxpayers to ‘fail to mention’ hobby businesses to their accountant. That doesn’t mean the IRS can’t figure out that a tax return doesn’t tell the whole story.
The new tax laws have given you a GIFT of REWARDS that other business owners are already grabbing. Are you ready to keep more of your own money and find out what the new Qualified Business Income deduction can do for you? I can help you!
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In 2017, the IRS had almost 77,000 employees and is planning to hire an additional 1,700 full-time employees before next years filing season. In order to help interpret and implement the Tax Cut and Jobs Act, the IRS is also planning on hiring more attorneys. Also coming will be upgrades to more than 140 computer systems and updates for more than 450 tax forms.
Additional expenses require more revenue. Don’t offer the IRS numbers that don’t look right. At the least your return could get a second look, perhaps a review or hit the benchmark for audit. Don’t put red flags on your hobby profit and loss issues that will leave you at a loss!
Your hobby profit and loss statement tells the story
Whether you consider your hobby a for profit business or a break-even means to justify financially something that makes life more enjoyable, be aware that your P&L shows up on your tax returns. IRS examiners and auditors know how to read that story.
The Journal of Accountancy recently highlighted three court rulings that offer insight on issues the IRS looks for, and that can be difficult for taxpayers to justify:
- A taxpayer failed to prove the unprofitable ranching effort was, in fact, a for profit endeavor while reporting a lucrative income from professional writing reported on a non-Schedule F activity;
- Another rancher was cited favorably as to his profit motive while showing years of losses, considerable time spent on other endeavors and the lack of a written business plan. These negatives were overridden by education in the field, his ability to make changes, hire experienced employees and a qualified manager with whom he stayed in daily contact.
- A former country music artist bought a club to bring together writers and new artists to perform. The Tax Court determined that the taxpayer had no intent to make a profit, had no expertise in club ownership, disregarded expert business advice and was motivated by personal pleasure in owning a performance venue.
All three of these rulings were based on adherence to the IRS’s 9-factor profit test under Sec 183. Although not all-inclusive, these nine factors can help you determine the legitimacy of your hobby as a for profit business that suffered losses.
Your hobby profit and loss and the 9-factor test
No one factor alone is decisive, and you should consider an overall picture of what you’re doing and if your activity is a business engaged in making a profit:
- Whether you carry on the activity in a businesslike manner.
- Whether the time and effort you put into the activity indicate you intend to make it profitable.
- Whether you depend on income from the activity for your livelihood.
- Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
- Whether you change your methods of operation in an attempt to improve profitability.
- Whether you or your advisers have the knowledge needed to carry on the activity as a successful business.
- Whether you were successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
The Tax Cut and Jobs Act of 2017 gave you a GIFT OF REWARDS, but unless you ACT NOW and contact me, you can’t take advantage of this opportunity to keep your own money! Together we can make changes right now to keep you from flushing your money down the IRS toilet!
Did you know the TCJA still contains errors and uncertainties that haven’t been finalized? These toxic unknowns and best-guess projections of IRS laws now involve accelerating or deferring income before year-end. Many business owners will run out of time to make critical adjustments before the end of the year to keep their own money! Don’t let this happen to you!
What’s the bottom line?
Whether you’re a business owner or not, every person should have a proactive, planned tax strategy. Don’t just wait for your tax person to tell you what probably happened last year and then tell you how much more you owe.
You can have the same opportunities as my clients have to control your own financial future. I can become your CPA tax specialist and financial business and life goals adviser and you can have the control you need and want.
Our goal is to become part of your overall life and business goal planning team so that you’ll be able to establish your own goals and know that you have a trusted professional on your team. We establish and maintain a personal and business relationship with our clients. Your LIFE is your business and your BUSINESS is your life. We’re here for YOU.
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