John R. Bullis: No profit motive means no deduction for losses
Joy Ford owned and operated a small music venue where songwriters could have their songs performed. It was operated to help songwriters display their music to talent scouts, record producers and agents. The facility featured live country music on Friday and Saturday nights. Joy chose the artists that performed. The standard fee paid to the performer was $500.
Her operation had losses she reported on her personal income tax returns. Those losses then offset income she received from distributions from three trusts that were established by her late husband.
The tax court looked at all the facts and circumstances to determine if she had a profit motive.
Since she had incomplete handwritten ledgers and only kept some receipts, the court said her records didn’t support the income and expenses reported on her returns.
Also, the court noted she got advice from business experts on how to increase her income, reduce her expenses and change the operations to have a profit, but she didn’t make any changes.
The court found she didn’t have a profit motive. It said she was mainly motivated by personal pleasure instead of profit and the losses that were used to reduce her income taxes. That meant the losses she claimed weren’t allowed. If her operations were a hobby, not a business, she was to report the income and only claim deductions equal to the income. IRS code section 183 describes what’s to be reported if the operations aren’t done to earn a profit.
It would’ve been helpful if she had written business plans that would’ve shown she changed the operations in an attempt to earn a profit.
Written business plans are helpful for all businesses. It’s a way to remember some changes to be done so a profit can be realized.
Since Joy received advice, but totally disregarded it, she displayed her intent wasn’t to make a profit.
Her “incomplete handwritten ledgers” counted against her. A business that’s intended to make a profit needs good records and reports to determine what actions might be helpful in increasing income and/or reducing expenses.
The QuickBooks and other computer programs give small and medium sized businesses a way to record the financial transactions. Handwritten records can qualify to help show a profit intent, but they need to be complete and accurate.
Did you hear? “One is not an expert on something until one has touched it, used it, experimented with it, broken it, and fixed it, over and over again,” by Peter H. Gregory.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.