Tax Lawyer's Blog

If you own and operate a trade or business and have a history of losses, there is a very good chance the IRS will at some point disallow those losses, especially if you keep poor records.

Although good bookkeeping is important in all cases, it is especially important for taxpayer’s with businesses that have shown a pattern of losses. The IRS website contains this entry about the requirement that taxpayers maintain adequate books and records (emphasis added):

Inadequate Books and Records

IRC § 6001 contains the requirements for taxpayers to maintain and keep records.

Treas. Regs. § 1.6001-1(a) provides that taxpayers must keep permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown in the taxpayer’s returns.

Treas. Regs. § 1.6001-1(e) provides that the books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees, and shall be retained so long as the contents thereof may become material in the administration of any internal revenue law.

Treas. Reg. § 1.183-2(b) lists nine factors that examiners must evaluate in determining whether or not a taxpayer’s business activities have been engaged in for profit:

1. Manner in which the taxpayer carried on the activity
2. Expertise of the taxpayer or his or her advisers
3. Time and effort expended by the taxpayer in carrying on the activity
4. Expectation that the assets used in the activity may appreciate in value
5. Success of the taxpayer in carrying on other similar or dissimilar activities
6. Taxpayer’s history of income or loss with respect to the activity
7. Amount of occasional profits, if any, which are earned
8. Financial status of the taxpayer
9. Elements of personal pleasure or recreation

The IRS will more closely scrutinize losses claimed as a result of a taxpayer’s involvement in one or more of the following businesses:

I wouldn’t be surprised to see “blogging’ added to this list sometime soon.

 Related Posts:

• CPA v. Unenrolled Preparer: Tax Code Requires Good Books and Records

Bookmark & Share: