Homebuilt tax writeoff

"Ron Wanttaja" wrote in message
...

The IRS wants to see a profit in three out of five years.

This is no longer true. The IRS lost a series of court cases on this one,
most notably because huge corporations such as Amazon.com, airlines, and
investment real estate would have been treated as hobby losses. Going after
only small businesses was unconstitutional under the equal protection
clause. Now the IRS uses other tests to determine if an entity is a
business.

Basically, you must demonstrate that the entity has "the trappings" of a
business and is operated like a business; that is, the business should have
its own bank accounts, pay its employees, charge for its services, have a
business address, be registered as a business under local laws, pay business
taxes, not mix business expenses with personal expenses, etc.

So, yes. If you bought a kit for the purpose of writing a book about
assembling it, the kit would probably be deductible if you actually wrote
and published a book and did all the other stuff. You should get a good tax
lawyer or accountant to set it up for you and make sure all your t's and i's
are crossed and dotted.

"C J Campbell" wrote:
The IRS wants to see a profit in three out of five years.

This is no longer true. The IRS lost a series of court cases on this
one,
most notably because huge corporations such as Amazon.com, airlines,
and
investment real estate would have been treated as hobby losses.
Going after
only small businesses was unconstitutional under the equal
protection
clause. Now the IRS uses other tests to determine if an entity is a
business.


I've been in tax practice for 40 yrs now. Sorry, but all of the above
is a complete fabrication.

Fred F.

"TaxSrv" wrote in message
...
"C J Campbell" wrote:
The IRS wants to see a profit in three out of five years.

This is no longer true. The IRS lost a series of court cases on this
one,
most notably because huge corporations such as Amazon.com, airlines,
and
investment real estate would have been treated as hobby losses.
Going after
only small businesses was unconstitutional under the equal
protection
clause. Now the IRS uses other tests to determine if an entity is a
business.


I've been in tax practice for 40 yrs now. Sorry, but all of the above
is a complete fabrication.

I guess you are entitled to your opinion, but I also have been in tax
practice for over 40 years.

C J Campbell wrote:

"TaxSrv" wrote in message
...
"C J Campbell" wrote:
The IRS wants to see a profit in three out of five years.

This is no longer true. The IRS lost a series of court cases on this
one,
most notably because huge corporations such as Amazon.com, airlines,
and
investment real estate would have been treated as hobby losses.
Going after
only small businesses was unconstitutional under the equal
protection
clause. Now the IRS uses other tests to determine if an entity is a
business.


I've been in tax practice for 40 yrs now. Sorry, but all of the above
is a complete fabrication.

I guess you are entitled to your opinion, but I also have been in tax
practice for over 40 years.

I've been in 'tax preparation' for more years than either of you.

Never been audited, but don't deduct stupid stuff that gets a flag on my
returns either.

If I ever get audited, I will learn more about the IRS than the auditor
will learn about me, for sure.
--


Mark Smith
Tri-State Kite Sales
1121 N Locust St
Mt Vernon, IN 47620
1-812-838-6351

http://www.trikite.com

"Mark Smith" wrote in message
...

Never been audited, but don't deduct stupid stuff that gets a flag on my
returns either.

If you never get audited, then a good argument can be made that you are way
too conservative.

C J Campbell wrote:

"Mark Smith" wrote in message
...

Never been audited, but don't deduct stupid stuff that gets a flag on my
returns either.


If you never get audited, then a good argument can be made that you are way
too conservative.

Yes, that was my thought also. I haven't been audited yet either, but
I'm not shy about taking deductions that I believe I'm entitled to take.
I get a couple of "flags" every year from my tax prep software that
say I'm taking deductions that are well above the national average in a
couple of categories, however, I believe they are legitmate based on my
understanding of the tax law so I take them.


Matt

"TaxSrv" wrote in message
...
"C J Campbell" wrote:
The IRS wants to see a profit in three out of five years.

This is no longer true. The IRS lost a series of court cases on this
one,
most notably because huge corporations such as Amazon.com, airlines,
and
investment real estate would have been treated as hobby losses.
Going after
only small businesses was unconstitutional under the equal
protection
clause. Now the IRS uses other tests to determine if an entity is a
business.


I've been in tax practice for 40 yrs now. Sorry, but all of the above
is a complete fabrication.

I should expand a little on my explanation. IRC 183 says that any activity
that makes a profit 3 out of 5 years is presumed to be a for profit venture.
However, this rule does not determine whether the activity is for profit; it
basically is a safe haven which says that if you do this you are presumed to
be in business for a profit. This is different than years ago when it was
pretty much presumed that if you did not make a profit 3 out of 5 years then
you were not engaged in a profit-making venture.

If the activity does not make a profit 3 out of 5 years, then the IRS uses
other rules to determine whether you are engaged in a business for profit.

I am not sure what you are claiming is a fabrication. Are you saying that
Amazon.com and real estate tax shelters would not fail the 3 out of 5 test?
Are you suggesting that the rules for taxpayers are different on the basis
of size of the business? Are you telling me that the IRS wins in court using
the 3 out of 5 test as the sole basis for determining whether the business
is for profit? Because if you are saying these things, then what you are
saying is a complete fabrication.

It is pretty easy to dismiss a complex issue by saying it is "a complete
fabrication" without backing it up with any evidence and while using an
anonymous handle. I seriously question whether you have been in tax practice
for any time at all, let alone 40 years, or you would know better than to
make such sweeping generalizations. Unless you are an IRS auditor, of
course.

Bottom line is that if you can establish a profit motive for your business,
then the 3 out of 5 year rule (or 2 out of 7 in some cases) does not apply.

"C J Campbell" wrote:
...
I am not sure what you are claiming is a fabrication. Are you
saying that
Amazon.com and real estate tax shelters would not fail the 3 out of
5 test?
....

Pure summary, assuming all this is inappropriate for the NG. Hobby
loss rules do not apply to "C" corporations like Amazon or the
airlines. "Equal protection" arguments don't apply to noncriminal tax
issues, as Congress can allow a tax benefit, or deny a benefit, for
makers of widgets, but not gadgets. It can creep into tax-exempt org
issues, though. The practical aspects of real-life hobby loss issues
tend to render the 3/5 test moot. Recent developments in the shift of
burden of proof in Tax Court and reimbursement of representational
fees renders even the "rebuttable presumption" rather moot. IOW, it's
all a pure factual question, whether the losing, alleged business
passes the basic sniff test for hobbies.

Unless you are an IRS auditor, of course....

Formerly, but mere Auditor hell. :-) Many yrs in technical,
managerial, and training matters; civil and criminal litigation.

Reg,
Fred F.

"TaxSrv" wrote in message
...
"C J Campbell" wrote:
...
I am not sure what you are claiming is a fabrication. Are you
saying that
Amazon.com and real estate tax shelters would not fail the 3 out of
5 test?
....

Pure summary, assuming all this is inappropriate for the NG. Hobby
loss rules do not apply to "C" corporations like Amazon or the
airlines. "Equal protection" arguments don't apply to noncriminal tax
issues, as Congress can allow a tax benefit, or deny a benefit, for
makers of widgets, but not gadgets. It can creep into tax-exempt org
issues, though. The practical aspects of real-life hobby loss issues
tend to render the 3/5 test moot. Recent developments in the shift of
burden of proof in Tax Court and reimbursement of representational
fees renders even the "rebuttable presumption" rather moot. IOW, it's
all a pure factual question, whether the losing, alleged business
passes the basic sniff test for hobbies.

Unless you are an IRS auditor, of course....

Formerly, but mere Auditor hell. :-) Many yrs in technical,
managerial, and training matters; civil and criminal litigation.

OK, I think we are on the same page, then. There is nothing preventing Ron
from setting up a "C" corp. Equal protection arguments do require that a law
or regulation be applied to everyone the same way. Thus, if profitability 3
out of 5 years presumes a business for profit, then it has to be applied to
everyone that way unless some exception is spelled out in the code, which
there isn't. Thus, the law can apply to widget makers or gadget makers, but
it applies equally to both unless Congress specifically says it applies only
to one or the other.

And my point is that the 3/5 test is irrelevant for almost all practical
purposes.

My own philosophy is: if there were no taxes would somebody do this as a
business? If yes, then the IRS is unlikely to have any problem with it,
either.

My main point is that neither Ron nor anybody else should base a business
decision simply on whether it passes some IRS rule which is probably
irrelevant anyway. You should make business decisions on the basis of
whether they are good business. If you do that then the IRS is nearly always
going to fall in line with what you want to do.

"C J Campbell" wrote:

OK, I think we are on the same page, then.
There is nothing preventing Ron
from setting up a "C" corp.

A C Corp is of no tax benefit for an activity which nets out losses
over the years. That's why Congress didn't include them in the hobby
loss rules. Nobody ever did it for something which could be viewed as
a hobby, nor ever would.

Equal protection arguments do require that a law
or regulation be applied to everyone the same way.

Cite a case where IRS lost on those grounds, other than a criminal
case, and rarely even there.

Thus, if profitability 3 out of 5 years presumes a business for
profit,
then it has to be applied to everyone that way unless some exception
is spelled out in the code, which there isn't.

Because there needn't be. Your premise doesn't describe real-life
litigation on this issue, nor does it reflect the practical effect of
Regulations under section 183.

Fred F.