As you know, business losses are deductible on a corporate tax return or on schedule C of a personal tax return. However the IRS looks closely at losses, especially on Schedule C, and may determine them to be “hobby losses” under certain conditions thereby denying the losses as a deduction.
The IRS looks at several factors to determine if the losses are associated with a bona Fide business. Some of these factors are: (1) Has the business made a profit in at least two of the past five years? (2) Is there a separation of business and personal bank accounts? (3) Does the business have a written business plan? (4) Does the business have adequate records to substantiate time spent on the business? (5) Does the business keep accounting records to show how profitability is determined? (6) Can the business demonstrate that accepted economic, business or scientific practices have been studied or followed? (7) Has the taxpayer ever owned or operated a successful business venture in the past?
If several of these factors (especially No. 1) are answered “no” then the odds are very likely that the IRS will find that the enterprise is more of a “hobby” than a business and will deny the business loss. In addition, if the examiner finds the year under examination to contain only hobby losses she will probably expand the audit to include several other years.
What happens when two or more people own real property and one wants to sell but the others do not? The law does provide a way out of this dilemma. It is called a Partition Action. One must file a suit in Circuit Court to partition the property, naming the other owners as defendant(s). A [...]
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When a tax examiner audits a cash intensive business, she is primarily looking to see if the taxpayer is reporting all of his income since there is no paper trail, such as a check, at the point of sale. An IRS Audit Technique Guide lists several indicators which the tax examiner can explore to see [...]
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Unfortunately, a business cannot just arbitrarily decide how to pay its workers. Whether or not a worker is classified as an “employee” from whom taxes must be withheld by the employer or an “independent contractor” whom the employer pays his full pay is determined by IRS regulations. As a general rule, the more control an [...]
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There are three ways to request an Offer In Compromise from the IRS. The first is Doubt as to Collectability. This is by far the most common type of Offer. The second is Doubt as to Liability, which is not used very often. The third (and newest) method under which you can submit an Offer [...]
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Did you ever wonder how many days you have to work each year just to pay your taxes? The day that you have earned enough money to do so is called Tax Freedom Day. This is the day when Americans have earned enough money to pay this year’s tax obligations at the federal, state and [...]
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Let me first address interest abatement. There is only one instance when the IRS will abate interest. That is when the IRS has either charged a tax it should not have or miscalculated the amount due on a tax. In other words, interest will only be abated when the IRS has made a mistake in [...]
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In my last blog, I mentioned several ways that “S” corporations incorrectly report expenses on their tax return. Let’s look a little more closely at these and see how these mistakes occur and why the IRS is targeting these mistakes. The main reason, of course, is that these mistakes benefit the taxpayer 80% of [...]
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The IRS has begun targeting small corporations, LLC’s and partnerships who have made the S Corporation election for tax filing purposes. Briefly, the difference between filing as a “C Corp” and an “S Corp” is as follows. A C Corporation files a tax return in which a profit or loss is shown, and if it [...]
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There are three primary types of bankruptcy: Chapter 7 – complete discharge; Chapter 11 – reorganization – used by businesses; and Chapter 13 - a payment plan to pay off debts. These remarks refer to Chapters 7 and 13. To discharge taxes in a Chapter 7 case, several tests must be met. The most important [...]
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