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Posted by L K Williams on March 16, 2008, 3:02 pm
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>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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