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Victor worked as business seminar organizer. In addition, he also engaged in a photography side business. He didn’t have a business plan for the photo business, didn’t keep adequate records, and used his bank account and credit cards to pay associated expenses. He also didn’t spend a lot of time in the photography activity. He also [ahem] had a history of losses. Funny that.

Victor got audited for taking losses on his tax return attributable to his photography activity. The Tax Court told Victor that the photography was merely a hobby, not a business — that is, he wasn’t in it to generate a profit.

Why is this important? Because if the activity were a business, then he could take his losses (not just his expenses, but his losses) and set those off against his (or his spouse’s (if filing jointly)) W-2 income. But if the activity is a hobby, and it generates a loss, then it’s a “hobby loss”, and hobby losses aren’t eligible for set-off against your ordinary income. As a matter of fact, a hobby loss is illusory; i.e., it doesn’t exist. The best you can manage with your little side business is to offset your expenses against your income.

So, if you have a side business, and you want to use your losses to offset your income, then be in it to win it (or at least make it look that way).

Here’s a link to the actual Tax Court Memo (published December 3, 2015): http://1.usa.gov/1NxFSvx

And for the professionals and curious, here’s the name of the case: Victor M. Kantchev, et ux. v. Commissioner, TC Memo 2015-234

Here’s a link to a newsletter I wrote about hobby losses several years ago: Hobby Losses Hit IRS Radar

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© David Herzog Legal 2015