Posted by Shoshana/AZ on 4/21/13 5:23pm
Msg #466555

For all those accepting the low ball fees....

Soon the IRS will get after you and call your business a hobby. Remember that you need to show a profit in three of the last five years in order for your business to be considered a business and not a hobby.

Reply by John Tennant on 4/21/13 5:45pm
Msg #466559

And after they call your business a hobby they reverse all of the deductions you have taken and you pay income tax on the income, penalties, and interest. I am currently representing a client with these same conditions. Not fun.

Reply by BrendaTx on 4/21/13 6:42pm
Msg #466573

John, can you show a small profit for years and

it be a hobby? I think the answer would be yes, but I don't know. I think that folks don't realize that the profit should be more than a few hundred dollars to qualify as a business.

Reply by John Tennant on 4/21/13 6:50pm
Msg #466574

Re: John, can you show a small profit for years and

I have not found any minimum limits on profit. The rule states that you must show a profit in 3 of 5 years to be considered a legitimate business. There are actually a few that I know that work out of their house and have a small profit. They do not take home office or mileage deductions and their expenses are not excessive. So, is there really a profit? Maybe, Maybe not. I have not been involved with any client that has been challenged under these conditions.

Reply by sueharke on 4/21/13 7:40pm
Msg #466578

...and John's fee for trying to convince the IRS that the client's intent is to make a profit is probably costing the client almost as much as the end result tax fi he loses. Plus the client get to pay John for his services.

Reply by ME/NJ on 4/22/13 8:07am
Msg #466588

Since my return I always show profit

and only do bare min write offs. I pay every year, I've been audited for 5 years in a row and stopped in 2009. Not even taking a chance anymore.

Reply by CopperheadVA on 4/22/13 8:17am
Msg #466589

Curious - Do you take a mileage deduction? n/m

Reply by SharonMN on 4/22/13 10:15am
Msg #466599

Actually, you do not need to show a profit for 3 of last 5 years. See below from IRS. If you do make a profit in 3 of 5 years, the IRS generally doesn't question whether your activity is a business. But it is entirely possible to lose money for several years and still be a legit business (e.g. medical research, oil drilling, any business with huge startup costs or volatile, sporadic income).

_____________

The following factors, although not all inclusive, may help you to determine whether your activity is an activity engaged in for profit or a hobby:
•
Does the time and effort put into the activity indicate an intention to make a profit?

•
Do you depend on income from the activity?

•
If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?

•
Have you changed methods of operation to improve profitability?

•
Do you have the knowledge needed to carry on the activity as a successful business?

•
Have you made a profit in similar activities in the past?

•
Does the activity make a profit in some years?

•
Do you expect to make a profit in the future from the appreciation of assets used in the activity?


An activity is ***presumed*** for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses).

Reply by Shoshana/AZ on 4/22/13 2:10pm
Msg #466620

SharonMN. Do you like to fight the IRS? Are you a CPA or EA?

Personally, I don't. Nobody in their right mind wants to go up against the IRS. So, I will continue to follow my CPA's advice. That's what I pay her to do.

Reply by sueharke on 4/23/13 12:41am
Msg #466671

I'm responding as a CPA and notary. It's great you understand what the term "presumed" profit is? My question is do you have the funds to pay a professional to fight the IRS and state taxing agencies? If not, a lot of self-defense tax returns and tax planning goes a long way to avoid additional professional fees for audit representation.