What, if anything, is wrong with this sentence?

at:

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Thank you very much.

I have to ask with a smile on my face if this is a question you use in class or on a take-home exam?

In order to have a business, you have to have revenue. If your hobby-turned-business produces revenue in excess of expenses, you now have Schedule C income subject to self-employment taxes.

You would be creating trap whereby if your business fails, the IRS may disallow your deduction and if it suceeds, you will be paying more taxes than if you had hobby income.

Plus you need to figure into this the costs of an audit and, possibly a Tax Court case. Regardless this is not a DIY project.

Dick

Isn't there still a safe harbor that making profits often enough counts as a business (without reference to the amount)? So a hobby business might make a small profit in each of several years, then a large loss (e.g. when expensive equipment is purchased and expensed), giving a net loss over several years, but profits in most of them.

Seth

It is a rebuttable presumption. Here is the IRS statement on "Presumption" from their audit guide:

Presumption that Activity is Engaged in for Profit

IRC § 183(d) provides a presumption that an activity is engaged in for profit if the activity is profitable for 3 years of a consecutive 5 year period or 2 years of a consecutive 7 year period for activities that consist of breeding, showing, training, or racing horses.

This presumption rule applies only after an activity incurs a third profitable (or second) profitable year within a 5 year (or

7 year) presumption period that begins with the first profitable year.

Note: Treasury Regulation § 1.183-1(c) has not been updated to reflect the 1986 amendment increasing the number of profit years required from two to three out of five years for activities other than horse racing, breeding or showing).

[If the table below does not format properly, you can see it at 8400,00.html#chapter01_05] Example 1 ? A taxpayer has the following profits and losses with a car racing activity (5 year presumption period):

Example 1 profits and losses Tax Year Gain or (Loss)

2000 (30,000) 2001 5000 2002 (60,000) 2003 2,000 2004 5,000 2005 (70,000) 2006 3,000 2007 (63,000)

The first 5 year presumption period begins with the first profit year of 2001, but the benefit of the presumption does not begin until the third profit year of 2004. The presumption is not available for 2001 through 2003 because it does not apply until the third profit year. The presumption is available during the first presumption period only in 2004 and 2005. The second five year presumption period begins with the 2003 profit year and runs through 2007. The presumption applies to the third profit year of

2006 and will be of benefit to the taxpayer for 2006 and 2007.

If the taxpayer meets the presumption rule, the Service can still argue that the activity is not engaged in for profit; however, the burden of proving that the activity is not engaged in for profit shifts to the Service. In addition, examiners cannot use IRC § 183(d) as the sole basis for disallowing losses under IRC §

183 even if it is shown that the taxpayer has not met the presumption rule.

Examiners should be alert for situations where the taxpayer may have manipulated income and or expenses to meet the presumption rule determination.

There's always a safe harbor somewhere, but in the end EVERYTHING depends on facts and circumstances.

Consider that your hobby does not require the purchase of equipment (Section 179 items) and you are making an additional $10,000 a year. Why call it a business and file a Schedule C whereby you will have to pay 14.3% self-employment tax?

Let us presume a memorabelia collector is making that $10K a year and her/his margin tax rate is 25%. We'll ignore State income taxes for simplicity. See if you agree with my arithmetic:

(1) 2500 = 10000 * .25 .... Tax obligation (2) 2500 = X * (.25 + .143) .... (1) + SE tax (3) X = 6361

Thus, taxpayer needs at least $3639 in expenses before calling her/his hobby a business.

If taxpayer needs to purchase equipment, the equations change. But then what hobby needs $5000 in equipment?

NOTE: I am not opposed to turning a hobby into a business. Rather I am raising the issue of self-employment taxes.

Dick

Golf, fishing, photography, motorcycle riding, yachting, web browsing, sports car racing, etc. etc. :)

Dick Adams wrote: [...]

.143 should be .153

It's pretty simple to include state taxes, just add the state marginal rate to .25.

What's not quite as simple is to take into account line 4 of Schedule SE and the adjustment for 1/2 SE tax on Form 1040 line 27:

SE = .153 * .9235 * X

2500 = SE + .25 * (X - .5 * SE) X = 6691

Doesn't change your point, but this wouldn't be a tax discussion group with some pedantry, right?

-Mark Bole