Had a sch business for several years - boat charter business. We did not do any business this year but continue to have depr and storage fees. We have had losses in the prior 3 years. Should we just not file sch c this year? Worried about the hobby rule anyway.
The title "hobby loss rules" is somewhat misleading. The Code does not use these words and I don't believe they appear in the regulations, either. What the code actually says is that an activity "not engaged in for profit" must show a profit in three out of five years or the losses incurred in any year will be disallowed. So, the three out of five rule should not be followed blindly. What you must do is build a case that you are actually engaging in the particular activity to make money. If you can prove that, the "hobby loss" rules don't apply.
I once had a client with a Servicemaster franchise who showed losses in most years. He asked me about these rules. My answer was that no one mops floors for fun! He wouldn't be doing the business if he didn't think he could make money. We never had a problem with IRS.
Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans
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