Hobby Losses in Greenwich, CT: Is Your Business a Business or a Hobby? Part 1

Our practice is focused on tax planning as well as civil and criminal taxpayer representation, and we see many IRS examinations of taxpayer’s businesses where the issue of the business intent is an issue if there is a tax loss: is the business really a business or is it the taxpayer’s hobby? The IRS has become very aggressive in this area, and it helps if taxpayers in Greenwich, Connecticut and elsewhere understand the rules regarding hobby losses for federal tax purposes. 

An activity, to be deemed a business and for the losses to be allowed, must meet the requirements of Internal Revenue Code § 162, which are:

·         The activity must be carried on with continuity

·         The activity must be carried on with regularity

·         The activity must be carried on with the primary purpose being to derive a profit

Deciding whether a taxpayer has met these standards requires a review of the facts of the taxpayer’s particular case.  If the taxpayer’s activity is deemed a hobby then Internal Revenue Code § 183 will prevent the taxpayer from taking hobby losses from the activity that exceed the activities generated income. 

The regulations create a 9 factor test that the IRS will use for determining whether the activity’s loss is truly a business loss or a hobby loss:

·         Manner in which the taxpayer carries on the activity

·         The expertise of the taxpayer or his advisors

·         The time and effort expended by the taxpayer in carrying on the activity

·         Expectation that assets used in activity may appreciate in value

·         The success of the taxpayer in carrying on other similar or dissimilar activities

·         The taxpayer’s history of income or losses with respect to the activity

·         The amount of occasional profits, if any, which are earned.

·         The financial status of the taxpayer

·         Elements of personal pleasure or recreation

The taxpayer does not need to meet all 9 of these tests to avoid an IRS hobby loss determination, and in fact recent court decisions have factored on the taxpayer’s only meeting a few of them.

In Part 2 of this series, we will focus on things the taxpayer should be doing in order to avoid having his or her business deemed a hobby and having the losses suspended for tax purposes.  

If you have any questions about IRS Hobby Losses or other IRS examination issues in Greenwich, Connecticut or elsewhere please feel free to contact me at (203) 285-8545 or by email at egreen@gs-lawfirm.com.

Eric L. Green

Green, & Sklarz, LLC

243 Tresser Boulevard, 17th Floor

Stamford, CT 06901

Ph. (203) 285-8545 x 102

Fax (203) 286-1311

egreen@gs-lawfirm.com

www.gs-lawfirm.com

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