Discussion:Disallow a loss?
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Discussion Forum Index --> Tax Questions --> Disallow a loss?
| 20 October 2008 | |
| I just wanted to know if there comes a point when you stop allowing a client to take a loss. I have a client who is coming up on her 3rd year of small business losses. I know the IRS wants someone to show a gain in 3 of the last five years so as to not be recategorized as a hobby but I also know they take other factors into consideration. Does there come a point when you reccomend to a client taking away a few business deductions so as to not show a loss? When you you get to that point? | |
| 20 October 2008 | |
| What is the client using for living expenses?
Another source of income? Borrowing from family? Savings? | |
Death&Taxes (talk|edits) said: | 20 October 2008 |
| "when you reccomend to a client taking away a few business deductions so as to not show a loss?" No way! Either the person spent the money, and can account for the source, as Kevin notes, or made the numbers up, in which case you do not listen. If the money was spent, you must then weigh Sec. 183 but for Pete's sake, if we followed IRS' line of thought, I suspect many successful ideas would have never seen light of day. You have to weigh the factors that are contained in Reg. 1.183-2(b) or for a more practical explanation, read http://www.writing.com/main/view_item/item_id/328910
I have many clients in the field of arts where this is the case, and then I think of John Kennedy Toole. Sometimes I think Toole took his life because his tax person thought his activities were a hobby loss. http://www.writing.com/main/view_item/item_id/508275 Forgive the self-promotion, but I am trying to convince my tax guy that my writing activity is serious. | |
| 21 October 2008 | |
| The client is an employee and is starting a business on the side. Her salary more than covers her living expenses. I would probably not normally reccomend that someone show a profit when they actually had a loss but since she has recently filed several late returns and had received several IRS letters (included 90-day letter) I just didn't want her to have any additional red flags on her return.
I appreciate the responses. | |
| 21 October 2008 | |
| If she has a profit motive, you have no legal reason for limiting deductions. | |
| 21 October 2008 | |
| Some court cases exist which have allowed non-profitable businesses operated in a business like manner such as a business plan, etc. Not enough time to research cites for you. | |
Death&Taxes (talk|edits) said: | 21 October 2008 |
| Trying to reduce profit motive to a count the years test can be pure idiocy. Read Stella Waitzkin, TCM 1992-216, and see the money spent by her with little return, then do yourself a favor and do a Google Search for Stella Waitzkin today.
I had a sculptor who minored in being a gigolo, but for 8-10 years he spent most of his salary from his work as an adjunct professor of art on his vision. An IRS audit came and Sec. 183 was the first attack. I let the agent bluster. He tossed out his currucula vita as meaningless, and also the publicity flyers and critical reviews of his shows. He was ready to throw out the audit year loss, and the loss for other open years, when I handed him a clipping from a recent newspaper......seems client had been awarded a major grant [Pew, Guggenheim....the kind that even a Philistine would know] for 50K. Case closed. The true answer is the facts and circumstances of the case in front of you. There are certain activities that are hobbies from the get go ['I make jewelry in my home and sell a few pieces at craft shows' or 'join me and sell for Quixtar']. | |
| 21 October 2008 | |
| It's a rare writer who's smart enough to take his life before his career get's started, usually they wait a while. His fictional hero (Riley?!) had the right idea about how to treat an employer though. | |
