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

Baton Rouge, LA |

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.

Attorney Answers 4


  1. Best answer

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

    Avvo doesn't pay us for these responses, and I'm not your lawyer just because I answer this question or respond to any follow-up comments. If you want to hire me, please contact me. Otherwise, please don't expect a further response. We need an actual written agreement to form an attorney-client relationship. I'm only licensed in CA and you shouldn't rely on this answer, since each state has different laws, each situation is fact specific, and it's impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue.


  2. 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.

    Hope this helps. If you think this post was helpful, please check the asnwer was a good answer tab below. Thanks. Mr. Geffen is licensed to practice law throughout the state of Texas with an office in Dallas. He is authorized to handle IRS matters throughout the United States and is licensed to practice in US Tax Court as well as The Court of Claims. This answer is provided as a public service and as a general response to a general question, it is not meant, and should not be relied upon as specific legal advice, nor does it create an attorney-client relationship.


  3. 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.

    Please remember to designate your question's BEST ANSWER.

    Please remember to designate your question's BEST ANSWER.

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

    Specialization
    Electrical-Chemical-Mechanical Patent (Intellectual Property) Attorney
    (562) 594-9784
    http://patentax.com/curt/index.html
    About Curt: http://patentax.com/curt/index.html
    Visit the Library: http://patentax.com/library/

    Curt Harrington Patent & Tax Law Attorney Certified Tax Specialist by the California Board of Legal Specialization PATENTAX.COM This communication is general information and not legal advice, and does not create an attorney-client relationship. This communication should not be relied upon as any type of legal advice. Please note that no attorney-client relationship exists between the sender and the recipient of this message in the absence of either (1) a signed fee contract and (2) remission of an agreed-upon retainer. Absent such an agreement and retainer, I am not engaged by you as an attorney, nor is any other member of my law firm.


  4. 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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