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Defending the “hobby loss” Rule with a Business Plan

  Sanjiv Gupta CPA  Published 
Defending the “hobby loss” Rule with a Business Plan

A business plan is very important where a business is concerned. As long as you have a business idea, you need to draft a business plan so that you can know how to set up the business. When a business is recurring losses, the IRS audits them. Also, the IRS reduces the inference or deductions claimed when a business is not set up to gain profit. The Internal Revenue Service has for many years defended ‘hobby loss” rule with a business plan. Listed below are some of the factors to consider like;

  • Does the taxpayer rely on making an income from the current business?
  • Has the taxpayer made some income from this business in previous years? If the answer is yes, how often has the business made this income and also how huge was the income?
  • Has the taxpayer out aside reasonable time and also dedication to the business to show that he or she has plans of making some income from it?
  • Has it been proven that the taxpayer has a tax plan of losing cash in the business to lessen its taxes from their main source of profit?
  • Is this business used to employ family relations who are in lower tax groups?
  • If the business in itself does not bring any income, does the taxpayer logically foresee generating income from the appreciation of equipment used in the business?
  • Does the income reason for the business overshadow the fun parts of the business?
  • If the business is generating losses, are these losses as a result of conditions out of the taxpayer’s power? Or, are those losses going at the start-up stage of the activity or business?
  • Has the taxpayer made income from a comparable business in years gone?
  • Does the taxpayer have the needed trade or activity understanding to go on with business success and also make the needed income? Or has the taxpayer seen or talked with other people who can provide the right routes and education to run the business very well?
  • If the business is making any losses, has the taxpayer tried to modify its process to make better and enhance income?

The secure harbor where the taxpayer is considered is if the business has generated some income in at least 3 years out of the last 5 years of its operation. When a business is not making profits like it should, there is a need for the IRS to come in and check if the reasons are beyond the control of the business. This helps to ensure that, the taxpayer is relieved of paying taxes.

For every business, the survey will differ. This is because; every business will have a different issue from the other. So, not all the investigations come with the same results. Due to the fact that there are different companies and also businesses, there is a strategy for every trade or business type to get the best results.


If you need a business plan, you may contact me at 510-709-4030.