A Well-Thought Out, and Provable Plan, Can Keep Your Business from Becoming a Hobby – Los Angeles Income Tax Planning and Income Tax Litigation Attorney Bruce Givner

by Bruce Givner on November 14, 2013

Under the Internal Revenue Code (IRC), generally a loss from a business activity is fully deductible and can be used to offset other nonrelated income. However, if the loss is incurred from a hobby, generally the amount deductible is limited and may not be used to offset other income. Internal Revenue Code Section 183. A recent Tax Court case proves sometimes the thin line between whether an activity is a business or a hobby comes down to a well-thought out, and provable, plan. Guillon v. Commissioner.

Guillon is a saxophone player. On his 2008 and 2009 federal income tax returns, Guillon offset losses from his Schedule C music business against W-2 income he and his wife earned. After an audit, the IRS disallowed the Schedule C losses on the grounds that from 2004 to 2010, the music business had earned only $13 thousand in revenue, while generating over $130 thousand in losses. Guillon filed suit with the Tax Court. Acknowledging that Guillon had not made a profit for seven years, the Tax Court nevertheless allowed the losses because Guillon proved he had a business plan to make a profit.

1. The time and effort put into the activity indicated an intention to make a profit. Guillon recorded several CDs, had set up a jazz festival, and had a concert tour set up in Spain for the summer of 2013.

2. He changed his method of operation to improve profitability. Guillon started his music business in Chicago. When many jazz clubs shut down in Chicago, he moved to Wisconsin where there was more opportunity, but he could still work in Chicago.

3. He expected to make a profit in the future. To increase his revenue, Guillon began to perform more original music.

4. The music business made a profit in 2011. Though he had 7 years of losses, all of Guillon’s effort to rebuild and refocus his business paid off when he showed a profit in 2011.

The court also felt Guillon had proven he had the knowledge to have a successful music business.
Givner & Kaye focuses on sophisticated income tax planning and compliance, tax litigation and procedure, estate planning, and asset protection plans for individuals and businesses in Beverly Hills, Calabasas, West Los Angeles, Hollywood, and other areas of Los Angeles, Orange, Ventura, San Bernardino, Riverside and Santa Barbara Counties. Call Los Angeles Estate Planning and Asset Protection Plan Attorneys Givner & Kaye at (310) 207-8008 today.

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