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Health & Fitness

Hobby Losses in Greenwich, CT: Is Your Business a Business or a Hobby? Part 2

In this post we discuss more particular elements for taxpayers to consider when operating their business to avoid a hobby loss issue with the IRS.

Our practice is focused on tax planning as well as civil and criminal taxpayer representation, and the focus of this entry in our IRS Hobby Loss series is how to avoid having your business in Greenwich, Connecticut (or elsewhere) deemed a hobby

As we discussed in our first entry, an activity will be deemed by the IRS to be a hobby, thereby suspending any losses the taxpayer has taken from the activity, unless they meet a 9 factor test in the federal regulations.

What we should discuss is how to make sure your business meets these requirements so you can avoid the hobby loss nightmare, as having losses suspended for 3 years (and the IRS examiner will suspend the losses for all three open exam years).

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What recent United States Tax Court cases show is that in making is determination about the proposed hobby loss issue, the court will focus on the taxpayer’s manner of operating the business, his or her expertise in the area, and how they reacted to business results and changing economic conditions.

Therefore, the following will become critical for taxpayers:

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·         The taxpayer has a business plan that they actually follow and, each year, review and adjust based upon how the business is doing and what is happening in the economy;

·         The operate like a business, meaning they advertise, keep books and records, etc

·         The taxpayer either has an expertise in the business area or they work on acquiring the expertise, which can mean they have consultants, attend seminars, etc

Operating the business like a business and not hobby can be critical.  In the United States Tax Court case of Dennis v. Commissioner, TC Memo 2010-216, the taxpayers started a horse breeding business.  The court noted (and put much emphasis) on the fact that at horse shows the taxpayer’s hired professionals to ride the horses with their advertising rather than ride the horses themselves.  The court felt this was proof of their intent to run this like a business and not their own hobby in which they enjoyed riding horses.   The Court determined that the activity was a business and did not subject them to the hobby loss rules.

It is important that taxpayers make sure they are operating like a business and not a hobby when they set out on their new venture.

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

New Haven, CT • Stamford, CT • New York, NY

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