- Ag Docket
The hobby loss rules bar deducting expenses that exceed income when a business activity is not engaged in with an intent to make money. It's a multi-factor analysis that determines whether the taxpayer had the required profit intent. In this case, a D.O. and his wife started an Amway business which they reported on a Schedule C. Over a seven-year period, they reported $29,489 in gross receipts and $192,427 in net losses. IRS audited and this case involved a year in which they had $4,811 of gross receipts and a net loss of $39,919. For that same year, the petitioners reported over $25,000 in expenses associated with vehicle and travel expenses. The petitioners sold many of their Amway products out of their home, but did make some trips associated with the business. The court agreed with the IRS that the petitioners did not engage in the business with a profit intent. They didn't use their business records to analyze the business or prepare profit projections or make a budget. They also didn't consult other disinterested professionals about how to conduct the business and had no prior related experience. Seven consecutive years of substantial losses were present. Penalties not imposed due to reliance on CPA to prepare returns and maintenance of good records. Mikhail v. Comr., T.C. Sum. Op. 2014-40
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