Question

Hobby Loss Presumptive Rule. Rachel Schurtz is a high school English teacher. In her spare time, she likes to make her own body lotion, lip-gloss, and bath and shower gel. She uses the bath products herself and gives them to her friends and relatives as gifts. In 2013, Rachel started attending arts and crafts festivals three or four times a year to sell her products. She hands out her business card so her customers can buy directly from her by phone or email. In 2013, Rachel reported a net loss of $375 from the activity. In 2014, she reported a loss of $460. Rachel is audited for the year 2014, and the agent disallows the $460 loss. Rachel is confident she will make a profit on her sales in 2015, and she assumes she will continue to make a profit after 2015. Rachel is not sure that she can prove that her activity is not a hobby right now. What can she do to delay or avoid having to prove to the IRS that her loss is not a hobby loss?

Answer 1

Solution and Explanation:

The following steps should be undertaken:

1. She should create extensive records of receipts, expenses, and other business dealings to demonstrate her profit intent which will give strength to fact that her activity is a business endeavor rather than hobby.

2. Secondly, she should keep ready a written and well-documented business plan clearly outlining the steps she would be taking to cut down losses and start earning profit.

3. She should demonstrate that she depends on her business endeavor for her livelihood to repel notion of it being a hobby.