Monday, January 29, 2018

Business Losses Disallowed

If you own a business, this one’s for you!

Businesses claiming losses year after year with NOLs and carrybacks is a significant problem.
We provide professional advisement for business owners of the substantiation requirements for their business income, expenses as well as requirements to prove what actions they have taken to improve business operations to minimize losses under the mandatory tax laws that a business is engaged with a profit motive.

Some business owners “heed” the advisement to improve performance, records substantiation and the credible ability to justify the losses more than just by the fact that it was claimed on the filed tax returns. Other business owners don’t heed the advisement and subsequently fail to be able to establish that the business was operating with a true profit motive as is required by the IRS.

At least once a week we hear from business owners who say “my accountant says claiming losses is fine”! Poor advice.

Continually claiming business losses with the intent to offset other taxable income, therefore, reducing overall tax liability is a substantial problem. It’s not just us as Professional Tax Experts saying so. It’s the tax law and we encourage every business owner to read this linked recent U.S. Tax Court case.

Joy Ford had an operating business establishment as a music club venue featuring live country music. As with many “cash-intensive” businesses, Joy obviously failed to properly report the business activity’s “actual” income revenues which ultimately serves to bite-her-in-the-butt. Joy claimed huge business operating expenses, kept little viable receipts or statements of the business’s true expenses.  Joy had other issues lurking for her too!

Joy’s lack of provable profit motive, lack of listening to business advisement and “elements” of her own personal enjoyment in operating the country music venue resulted in the business activity being deemed by the court as a hobby activity not engaged for profit.
Huge issue! Hobby activities cannot report a loss. Hobby activities can only deduct certain types of expenses to the extent of “income generated and reported”.

If you’re a business owner, grab a cup of coffee, tea or your fave beverage then click on the link below to read this tax case. It’s a “short” 7 pages in comparison to most cases that are usually much longer.  We believe you will learn a lot.

These are not just our words as Tax Experts!
This is how the tax laws are and how the courts will rule on the case. 

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