One of the benefits of owning a business is the ability to take deductions for expenses that are legitimately used in an effort to produce income. Some Georgia businesses end up in the red where expenses exceed income for the particular tax period. If this occurs regularly or in an excessive amount, the attention of the IRS may be triggered. The issue that may arise is the determination of whether the enterprise is in fact a for-profit business or if it is more of a hobby, for which losses cannot be deducted.
Tax advisers point to tax code Section 183 – ‘Activities not engaged in for profit” as the authority for what has come to be known as the hobby loss rule. If a taxpayer is claiming a tax loss on a business, not only is the income from that activity not taxable, the amount of the loss reduces other taxable income, which can be extremely beneficial. Although the tax laws indicate many factors to be considered, the IRS most typically focuses on the manner in which the activity is operated to gauge whether it’s a business or simply a hobby.
Many small business owners are notoriously poor record keepers, and while this may cause some questions if the taxpayer is audited, it is more problematic for the individual claiming a loss. It is recommended that business and personal finances be kept completely separate, having an established business protocol that resembles other similar types of businesses, and a showing of a willingness to improve practices to attain profitability. These are the indications the IRS will look towards in rendering its decision.
A tax dispute or a tax audit with the IRS is not fun. An experienced tax lawyer might be instrumental in arriving at the best possible resolution for a tax problem.