How does the IRS state that my business looks like a hobby, or a tax dodge.

While I am not in any trouble I want to also make sure i don't get into it either. If I walked away from my business there would be repercussions. I would have a leases to break, employees to lay off, and there would be loans to pay. My business is also something that many people do not do for a hobby. However, I still show a lost, and have been for a few years. This is my sole income. My wife works. I do take a small salary, and I do mean small real, real small for the hours I put in. So, should I be worried the IRS will classify what I do as a hobby or a tax doge? Thanking you for taking the time to read my worries.

Baton Rouge, LA -

Attorney Answers (4)

Pamela Koslyn

Pamela Koslyn

Business Attorney - Los Angeles, CA
Answered

Please see the attached IRS document, and if you do hear from the IRS, consult your own CPA ASAP or a tax lawyer.

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Arthur Harold Geffen

Arthur Harold Geffen

Tax Lawyer - Carrollton, TX
Answered

I would add to the prior answer that in my experience at the audit level, if you show gross income, even though you have net losses, generally you survive a hobby loss challenge.

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Curtis Lamar Harrington Jr

Curtis Lamar Harrington Jr

Tax Lawyer - Long Beach, CA
Answered

Why don't you adjust operations in order to make a profit?
(even a small one).

Why would someone continue a business that is losing money?

Are you taking too many deductions?

How are your deductions as compared with others in your industry?

Aside from the pure theoretical hobby/loss question, one aspect I've seen people bured on is the inclusion in one business of the expenses of another business or of another business that does things that are personal.

Yeah, it can get to be a big problem, but without knowing the whole picture, no one will have a clue.

Sit down with your tax advisor and see what's wrong and what can be done to fix it.

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Curt Harrington
Certified Tax Specialist -- State Bar of California Board of Legal

Specialization
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(562) 594-9784
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Christopher Michael Larson

Christopher Michael Larson

Tax Lawyer - Seattle, WA
Answered

Net income in three of five years will create a presumption of a business purpose. Many factors:

1. Level of record-keeping
2. Hiring of professionals to handle matters such as accounting, tax returns, etc.
3. Whether you have other full-time employment
4. Level of enjoyment received by doing the activity
5. Whether you would continue to do it if it never made money
6. Do you have a reasonably prospect of profit
7. Are you bringing in revenue?

These are the factors considered under case law and the regs. Many cases involve the ownership of horses as racing, show horses, etc.

Christopher Larson
Insight Law

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