Aircraft Charter Business That Incurred Losses for 12 Straight Years Was For-Profit Activity – A common issue involves how long a taxpayer can show a loss from a business before IRS classifies it as a non-deductible hobby. Many people, including far too many tax professionals, misinterpret the IRS safe harbor rule.  What this rule says is that IRS is required to accept a venture as a deductible business if it shows net profits in three out of five years.  Many people construe that to mean any business not meeting that test is not producing deductible losses.  As this case cited by CCH proves, that has never been the case. 

As with any tax matter, the burden of proving you are entitled to claim a business loss lies with you.  You must be able to prove to IRS or the Court that you have been conducting the business according to professional standards that could eventually result in net profits and it is not just being done for fun.  In fact, I have always advised anyone who is interfacing with IRS to banish the word FUN from their vocabulary in regard to their businesses.  Once that word pops up, IRS auditors scrutinize everything more closely in their search for expenses to disallow.  The fact is that most IRS auditors hate their government civil service jobs and cannot fathom the fact that many of us self employed people actually enjoy what we are doing.

 You can download the full record of this case from the Tax Court website.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 7/28/2005 12:11:00 PM Send this post: