Welcome to the
Virginia Tech 2014 Tax Seminar
 Team Introductions
 Schedule, Hours, Supplement & CD
 Cell Phones to Off or Vibrate
 No Smoking Please
 CPE Credit Forms
 How We’ll Handle Questions
Trade or Business
Chapter 4 pp. 109 - 137
2015 National Income
TAX Workbook™
Trade or Business
p. 109
 Definition of Trade or Business
 Selected Provisions for Trades or
Businesses
 New Business Models & NonTraditional Occupations
 Trade or Business References
Definition of A Trade or Business
p. 110
 Neither the Code nor the Regulations
contain a definition of Trade or Business.
 Facts and circumstances are definitive.
 IRS Rulings and Court cases tend to define
a Trade or Business.
 Taxpayer must have a profit motive and (for
some provisions) be involved.
Factors Indicating a Trade or
Business
pp. 110 - 111
Trade or Business Considerations by the
Courts:
 Corp in business due to extensive real
estate activities. Flint V Stone, Sup Ct 1911.
 Gambler who spent full time gambling &
intended to live off winnings in business
even though he did not offer services or
goods to others. Groetzinger, Sup Ct 1987.
 And…….
Factors Indicating a Trade or
Business
pp. 110 - 111
Trade or Business Considerations by the
Courts:
 Extent, continuity, variety and regularity of
activity are factors to be considered.
Higgins, 312 US 212 (1941).
 Temporary cessation of business does not
necessarily mean you are no longer in
business. It depends on whether cessation
is temporary or indefinite. Haft, 40 TC 2
(1963) and Schnelton, TC Memo 1993-264.
Practitioner Note
Rev. Rul 67-12, 1967-1 CB 29.
p. 112
Cash basis taxpayer who:
 Incurs business expenses,
 Closes business before paying the
expenses and
 Later pays the expenses
Can deduct the expenses on Sch C in the
year of payment via Schedule C even though
there is no income and taxpayer is no longer
in business.
Part Time Enterprise
p. 112
Ex 4.1
 TP worked in oil field until laid off in 2013.
 2014 he bought a house for $25,000.
 Spent $14,500 rehabbing the house.
 Sold house for $45,000 in November 2014.
 December 2014 got a full-time job in oil industry.
 Does not plan to rehab any more houses.
Questions 1 and 2:
 Is Joe in Rehab business in 2014 for SE taxes?
 Where should Joe report the income from sale?
Part Time Enterprise
p. 112
Ex 4.1
Questions 1 and 2:
1. Is Joe in Rehab business in 2014 for SE taxes?
▪ No. Not in business of rehabbing and owes no
SE tax on profit. Rehabbing one house without
any intent to do more rehabbing does not put
you into a trade or business. See Batok, TC
Memo 1992-727.
2. Where should Joe report the income from sale?
▪ Form 8949 as a Sale of a Capital Asset.
▪ SP $45,000 – (Basis $25,000 + $14,500) = $5,500
Capital Gain
Sole or Principle Business
p. 112
 Taxpayers can have two or more
businesses as well as full time jobs.
Achong, (9th CA), 1957.
 Full time Federal employee held to also
be in real estate business. Schott, TC
Memo 1964-272.
 Separate businesses require separate
Schedules C or F.
Not For Profit Activities
p. 113
 §183 prevents deduction of losses where an
activity is not engage in for profit.
 Presumption that taxpayer is in an activity for a
profit if there is profit in:
▪ 3 out of 5 years or
▪ 2 out of 7 years for horse activities.
 If presumption is met and IRS challenges the
issue the burden of proof is on the IRS.
 If presumption is not met facts and circumstances
in deciding taxpayer’s intent are controlling.
Impact If Not Engaged in Activity
For Profit
p. 113
 Gross income from activity goes on line 21,
Form 1040.
 Expenses in excess of income (Losses) are
not deductible.
 Allowable expenses are deductible as
Miscellaneous Itemized Deductions on
Schedule A subject to the 2% of AGI
limitation…We’ll discuss this on pp. 116-118
Profit Motive Factors
pp. 113 - 114
 §183 determination based on taxpayer’s intent.
 Intent is determined by considering all of the facts
and circumstances.
 The Regulations set out 9 factors to be
considered.
 The Court look to all the facts including the 9
factors.
 No one factor is determinative. Having more of the
9 factors does not mean you win.
Profit Motive Factors
pp. 113 - 114
 The 9 Reg factors used in §183 determinations:
1. Manner in which activity is carried on.
2. Expertise of taxpayer or advisors.
3. Time and effort taxpayer spend on activity.
4. Expectation activity assets will increase in value.
5. Success of taxpayer in other activities.
6. Activity’s history of profit and loss.
7. Amount of occasional profits from activity.
8. Financial status of taxpayer.
9. Elements of personal pleasure.
Hobby Activity Determination
pp. 114 – 115
Ex. 4.2
 Lois always wanted a horse.
 As a successful businesswoman she bought a
ranch and began buying horses to be sold to
disabled people for therapy.
 She employees people to care for and train the
horses, goes there as often as she can and rides
when she is there.
 She has had no sales for 6-years and has had
substantial losses.
 She attributes losses to the time its taken to learn
the type of horse to buy and train.
Hobby Activity Determination
pp. 114 – 115
Ex. 4.2
 Lois does not qualify for the presumption so we
consider the factors in determining her real intent.
 Lois spends as much time as possible at the
ranch but spends little time trying to sell the
horses. She devotes most of her time to her
marketing company.
 Lois is successful and wealthy and does not need
any income from the sale of horses.
 There have been losses and no sales of horses.
 We do not know if she has researched the activity
or her experience other than wanting horses.
Hobby Activity Determination
pp. 114 – 115
Ex. 4.2
 Lois did build a successful marketing
company.
 The ranch is increasing in value but the
horses may or may not be.
 Lois loves horses and riding.
 Which factors weigh in her favor?
 Which factors weigh against her?
 What would you tell this new client?
Hobby Activity Determination
pp. 114 – 115
Ex. 4.2
 Which factors weigh in her favor? Against her?
 What would you tell this new client?
 Develop a plan, get involved, market horses, run
ads in magazines, learn or hire someone
knowledgeable in the activity, maintain business
records.
 Be prepared to settle the issue….Each year
stands on it’s own.
Election to Postpone
Determination
p. 115
 File Form 5213 to postpone an IRS determination
until the close of the 4th year of beginning the
activity.
▪ 6th year for horse activities.
 Deadline for filing is 3 years from due date of
return for the year the activity started or 60 days
after IRS issues notice to disallow losses.
 Filing Form 5213 extends the statute of limitations
until 2 years after the due date of the return for
the last year in the presumption.
Election to Postpone
Determination
p. 115, Ex 4.3
 BB is a bowler who decided to go
professional.
 His entry fees and travel exceeded the
prizes he received the first two years of
competitions.
 BB had no sponsors and deducted
substantial losses in 2012, 2013 and 2014.
 BB has not (yet) been contacted by the IRS.
 Con’t
Election to Postpone
Determination
p. 115, Ex 4.3
 BB is a bowler who decided to go professional.
 His entry fees and travel exceeded the prizes he received
the first two years of competitions.
 BB had no sponsors and deducted substantial losses in
2012, 2013 and 2014.
 BB has not (yet) been contacted by the IRS.
1.
2.
3.
4.
What is his deadline for filing Form 5213?
If he timely files what is the statute of limitations?
Is filing the same as asking for an IRS audit?
What happens if the IRS audits the 2012 return in
2018 and finds non-bowling adjustments?
Election to Postpone
Determination
p. 115, Ex 4.3
1. What is his deadline for filing Form 5213?
A. Activity started in 2012.
B. That return is due 4/15/2013
C. His 3-year period ends on 4/15/2016 if the IRS
has not issued a report disallowing losses.
D. If IRS has proposed to disallow losses he must
file within 60-days of the notice and before
4/15/2016.
Election to Postpone
Determination
p. 115, Ex 4.3
2. What is the statute of limitations if BB files the
Form 5213?
A. Activity started in 2012.
B. So the presumption period goes thru 2016.
C. Due date for the 2016 return is 4/15/2017.
D. Two years later is 4/15/2019.
E. The statute of limitation for the 2012, 2013 and
2014 (and 2015) returns will be 4/15/2019.
Election to Postpone
Determination
p. 115, Ex 4.3
3. Is filing the same as asking for an IRS audit?
A. Maybe….Maybe not.
B. Not filing could mean you lose the opportunity
to postpone an IRS determination to see if you
qualify for the presumption
Election to Postpone
Determination
p. 115, Ex 4.3
4. What happens if the IRS audits the 2012 return
in 2018 and finds non-bowling adjustments?
A. The normal statue has expired and so the IRS
cannot make adjustments to the return except
for those related to or effected by the activity if
the Form 5213 had been filed.
Restriction on Deductions
p. 116 - 117
No deductions are allowed if there is no income
from an activity not engaged in for profit.
§183 does not apply to C Corps but does apply to:
 Individuals
 S Corporations at the corporate level.
 Partnerships at the partnership level.
 Trusts
 Estates
Three Tiers for Expenses Under §183,IRC
p. 117
Tier / Category 1
Expenses that are otherwise deductible such as property
taxes, mortgage interest, casualties, etc. These reduce the
income of the activity and then are deductible as itemized
deductions.
Tier / Category 2
Activity expenses that do not affect basis such as utilities,
advertising, insurance, etc. These are only deductible as
itemized deductions limited by 2% of AGI & limited to the
income from the activity after Tier 1 expenses are allowed.
Tier / Category 3
Activity expenses that impact basis like depreciation.
Limited to income after Tier 1 & 2 expenses – Item Ded – 2%
Three Tiers for Expenses Under §183,IRC
p. 117
Question 1
Ex 4.4
Same facts as Example 4.2 - Lois’ horse activity.
Can she deduct the losses since she in the 7th year?
No.
For the presumption she needs a profit in 2 of 7
years and she has had losses in 6 years. Even with
a profit in the 7th year she canNOT meet the
presumption.
Under facts she was not in the activity for profit.
Three Tiers for Expenses Under §183,IRC
p. 117
Question 2
Ex 4.4
Same facts as Example 4.2 - Lois’ horse
activity.
In 2014 Lois sold horses & grossed $27,000
She paid ranch real estate taxes of $24,000
She paid ranch wages of
$48,000
She has additional feed & other expenses.
How do you report the activity on the return?
Three Tiers for Expenses Under §183, IRC
p. 117
Question 2
Lois’ 2014 Income and
Expenses
Gross Inc. – Line 21, Form 1040
Tier 1 Expenses:
RE Taxes on ranch residence
RE Taxes on activity
Diff – Tier 2 & 3 Expense Limit
Tier 2 Expenses:
Wages & Other
Sch A
Ex 4.4
Sch A
2% Limit
$27,000
$4,000
( 20,000)
$ 7,000
$20,000
(
7,000
$27,000
7,000)
Three Tiers for Expenses Under §183,IRC
p. 117
Question 3
Ex 4.4
What should you do about Lois’ prior tax
returns?
Three Tiers for Expenses Under §183,IRC
p. 117
Question 3
Ex 4.4
What should you do about Lois’ prior tax
returns?
Warn of potential IRS audit.
Offer to prepare amended returns.
Nothing if Lois so directs.
Three Tiers for Expenses Under §183,IRC
p. 118
Question 4
Ex 4.4
What if Lois had incorporated the ranch 6years earlier and not made an S corp
election?
Three Tiers for Expenses Under §183,IRC
p. 118
Question 4
Ex 4.4
What if Lois had incorporated the ranch 6years earlier and not made an S corp
election?
§183 would not be applicable.
Losses would be trapped in C Corp and only
off set any income it had.
Three Tiers for Expenses Under §183,IRC
p. 118
Question 5
Ex 4.4
What if Lois’ ranch operation begins to have
profits in the future?
Three Tiers for Expenses Under §183,IRC
p. 118
Question 5
Ex 4.4
What if Lois’ ranch operation begins to have
profits in the future?
The 7-year presumption shifts each year so
she could show profits in 2 of 7 years in the
future and get the presumption.
In addition, each year stands on its own facts.
Selected Provisions for Trades
and Businesses
p. 118
 Self-Employment Taxes
 Travel Expenses Away from Home
 Start-up Expenses
Self-Employment (SE) Tax
p. 118
 SE tax applies to all individuals in a trade or
business as a sole proprietorship or by
partner in a partnership.
 §1402, IRC, imposes the SE tax.
 Practitioner Note – The SE tax applies to US
persons and not to non-resident aliens.
 SE tax is due on foreign earnings even if
foreign earned income is excludible from
income taxation (unless a treaty excludes).
Income Items Excluded from Self
Employment (SE) Tax pp. 119 - 120
See lists on Pages 118 – 119 that include:
 Most income not taken into account in gross income for
income tax purposes.
 Rents from real estate and from personal property leased
with real estate unless:
▪ The rents are received in the course of a trade or
business as a real estate dealer or
▪ The land is used for certain conditions which are
discussed later.
 Dividends and interest unless received in the course of a
trade or business as a dealer in stocks or securities.
 Capital gains and losses and certain other gains such as
sales of business assets.
Income Items Included for Self
Employment (SE) Tax
p. 120 - 121
See list on pages 120 -121 that include:
 Director’s Fees
 Recaptures of 179 and 280F deductions when bus use
drops to 50% or less.
 Gains and Losses from options and commodities dealers
from §1256 from contracts or from property related to
those contracts.
 Distributive share of PS income or loss whether or not
distributed.
 Compensation & housing allowance of clergy who have not
elected out of SS.
 Wages paid by an international organization to US citizen.
SE Income from Farming
p. 121
Individuals operating farming business are subject to SE Tax.
See list on page 121 but some specific items include:
 Patronage dividends from farm co-ops even if the taxpayer
was not farming when the payments were made.
 Value added payments from a co-op even if the farmer
bought the grain rather than grew it.
 Conservation reserve program payments.
 Storage fees paid by the Commodity Credit Corp under a
reseal agreement.
 National Tobacco Settlement Trust payments to a farmer
who raises and sells tobacco.
 Payments for pasturing, feed & caring for another’s cattle.
SE Income from Rental Property
p. 121
 Rentals of real estate and personal property
leased with real estate are exempt from SE
income.
 But, if significant services are provided with
the real estate the activity is not rentals and
is subject to SE Tax.
▪ Hotels, Motels, B&Bs subject to SE Tax.
▪ BoBo court decision held owner of mobile
home operation was subject to SE Tax
due to services provided.
Renting Personal Property
p. 122
 Rental of personal property (machinery,
vehicles) is subject to SE Tax and goes on
Sch C if not related to rental of real property.
 If personal property rentals are for profit but
sporadic:
▪ Income goes on Line 21, Form 1040
▪ Expenses go on Line 36, Form 1040
▪ Write-in entry is PPR.
Real Estate Dealers
p. 122
 SE Tax exclusion for rents does not apply to
real estate dealers.
 Real Estate Dealers:
▪ “Engaged in the business of selling real
estate to customers with a view to the
gains and profits that may be derived from
such sales.”
▪ Does not include an investor who sells a
piece of real estate.
Rent from Land Used in Agricultural
Production
pp. 122 - 123
 Generally land rentals excluded from SE tax.
 Exception subject to SE tax:
▪ Land is leased for agricultural purposes
and lessor will materially participate in
production, management and
▪ There is material participation which
includes a level of pay, furnishing of
assets, providing advice or consultation
or inspecting activities.
Rent from Land Used in Agricultural
Production
p. 123
 “Material Participation” for a lessor of land if he /
she meets any one of four tests:
1. Pays > ½ of direct crop production, furnishes > ½
tools, equip or livestock, advises or consults with
tenant or inspects production activity.
2. Regularly or frequently is involved in managing
operations.
3. Works > 100 in the activity.
4. Involvement is material and substantial.
Summary of Rulings and Cases
p. 124
 Accountant was employee of his closely held
accounting firm (S Corp).
 Citrus Grove Owners were employees due to
agreement to pick and market produce.
 Contractors who did home repairs were not
employees of homeowners but in trade or
business.
 Drug Dealer is in a trade or business subject to SE
tax but dealer’s son who stole cash from father is
subject to income tax but not subject to SE tax.
Summary of Rulings and Cases
p. 124
 Honoraria – Acceptance of pay for an occasional
speech, presentation is not subject to SE BUT
doing so on a regular or continuing basis is SE Inc
 Hospital Owner – Doc owned hospital but turned
operation over to a management company. Doc is
subject to SE Tax since operation is a business.
 Incompetent Person – Business operated by
guardian is SE income for incompetent person
who owned trade or business.
 Inventor – Not subject to SE tax since did not
develop or design invention regularly.
Summary of Rulings and Cases
p. 125
 Investor in cattle operation not subject to SE tax
where involvement was minimal.
 Law Practice – Gov’t employee who operated parttime law practice not subject to SE tax where fees
were low, kept no records & meant to gain legal
experience. Business deductions not allowed.
 Leasing of crab pots and nets to fishermen for
several years & expected to continue was subject
to SE tax.
 Oil & Gas Working Interests are SE Income subject
to SE tax.
Summary of Rulings and Cases
p. 125
 Real Estate Agents and Direct sellers are statutory
non-employees and thus subject to SE tax.
 Seminar Speaker – Professor who worked for
University and also gave seminars is subject to SE
tax on seminar income even though fees paid to
him thru the University.
 Tree Cutter paid hourly by a timber mill was
subject to SE tax as a skilled, independent
contractor.
 Window Installer who did the work for one month
not subject to SE tax since work not continuous.
Practitioner’s Note
p. 125
 Employee V Independent Contractor
 Distinction is determined by weighing 20Common Law factors.
 The goal is not to simply add up who the most
factors favor but to determine whether the worker
is:
▪ Economically dependent on the employer or
▪ Is in a trade or business for himself.
Comment: More recently the IRS has divided the
20-Factors into three categories for analysis.
Regular and Continuous Involvement
p. 126
Ex. 4.6
 2015 Joe (Handyman from ex 4.1) decided to rehab
more homes and had a list of buyers for homes.
 Joe quit his job, rehabbing homes became his
trade or business, he started keeping records, etc.
 Question 1:
 Should Joe allocate expenses to each house?
 Question 2:
 Are sales subject to capital gains treatment?
 Question 3:
 Does it matter if Joe had kept his full time job?
Regular and Continuous Involvement
p. 126
Ex. 4.6
 Question 1:
 Should Joe allocate expenses to each house?
▪ Yes!
▪ Since in a trade or business §263A applies.
▪ Direct expenses must be allocated to each
home.
▪ Since indirect expenses are less than $200,000
@ year they do not have to be allocated and can
be deducted on Schedule C.
Regular and Continuous Involvement
p. 126
Ex. 4.6
 Question 2:
 Are sales subject to capital gains treatment?
▪ No.
▪ Since sales are from the trade or business
income is taxed as ordinary income.
 Question 3:
 Does it matter if Joe had kept his full time job?
▪ No. Even though the rehabbing of houses is
part time it is regular and continuous and so is a
trade or business.
Travel Expenses
p. 126
 Two rules allow taxpayers to deduct travel
expenses including meals and lodging:
1. Reg §1.262-1(b)(5) allows deduction of
expenses incurred in traveling away from
home in the course of a trade or business.
2. Commuting expenses are not deductible,
transportation between places of business are
deductible and transportation from a home
that is a place of business to another place of
business is deductible. See cited Court cases.
Practitioner’s Note
Tax Home V Residence
p. 126
 Tax Home and Residence are two
distinct places:
▪ Tax home is the area where a
taxpayer lives AND works.
▪ Residence is the area where a
taxpayer lives whether or not he / she
works in the area.
IRS Position
Tax Home V Residence
p. 127
Deductibility of commuting transportation between home and
work:
 Transportation from residence to a temporary work site
outside of the metro area of the residence is deductible.
 Transportation from residence to a temporary work site
within the metro area is deductible if a taxpayer has one or
more regular work locations other than the residence.
 Transportation from a residence which is the principle
place of business is deductible whether or not going to a
regular or temporary work site.
IRS Position
Tax Home V Residence
p. 127
 Temporary V. Indefinite:
▪ If employment at a work location is expected to
last for 1 year or less the stay is temporary.
▪ If employment at a work location is expected to
last more than 1 year the stay is not temporary.
▪ If employment is expected to last less than 1
year but goes for longer the stay is temporary
but changes to indefinite when the expectation
changes.
Principle Place of Business
p. 128
 For transportation expenses from the residence to
be deductible the residence must be the “principle
place of business.”
 §280A is used to define “principle place of
business” except the “exclusive use” requirement
is not applicable for this requirement.
 So the residence must be either:
▪ Used to meet with patients, clients, etc or
▪ Be a separate structure or
▪ Be regularly used (not exclusively) for business.
Tax Home
pp. 129 - 130
Ex. 4.7
 Joe keeps his tools in his truck and drives from his
residence to various job sites to rehab houses.
 Joe does no administrative or rehab work at his residence.
 Because he has no regular place of business he cannot
deduct his commuting trip from his home to his first job
site or back to home from the last.
▪ Q1 – Suppose Joe rehabs a house outside of his
normal metro area?
▪ Q2 – Suppose he sets up a shop in his garage?
▪ Q3 – Suppose he has an office at home used
regularly but not exclusively for admin work?
Tax Home
pp. 129 - 130
Ex. 4.7
Q1 – Suppose Joe rehabs a house
outside of his normal metro area?
His trips are considered away from his
tax home and so are deductible.
Tax Home
pp. 129 - 130
Ex. 4.7
Q2 – Suppose he sets up a shop in his
garage?
The IRS would not allow a deduction for his
first and last trips to and from home since
he does not have a regular place of
business away from his residence.
The Tax Court would allow the deduction
because his residence is now a regular
place of business.
Tax Home
pp. 129 - 130
Ex. 4.7
▪ Q3 – Suppose he has an office at home used
regularly but not exclusively for admin
work?
Joe could deduct his first trip from his residence
to a job site and his last trip home from a job site.
While the requirement relies on the §280 definition
of place of business the exclusive use rule in §280
does not apply in deciding the issue of
transportation costs.
Start-Up Expenditures
p. 130
Start-up expenses are those paid or incurred to
investigate the creation or acquisition of a trade
or business that would be currently deductible if
incurred in operating an existing trade or
business.
Investigatory costs include those to analyze or
survey potential markets, products, labor supply,
facilities, etc.
Preopening expenses are start-up costs incurred
after deciding to open a business but before the
business is opened: Ads, employee training, etc.
Start-Up Expenditures
p. 130
Travel for start up, investigation and preopening are part of these expenses.
But, interest, taxes and research &
experimental costs are excluded.
IRS distinguishes types of expenses in Rev
Rul 99-23, 1999-20 IRB 3 clarified by
Announcement 99-98, 1999-36 IRB 408
Start-Up Expenditures §195
p. 130
Total start-up expenses < $50,000 can elect to
▪ Deduct up to $5,000 of start-up costs and
▪ Amortize remainder over 180 months
Total expenses > $50,000 must:
▪ Reduce deduction dollar for dollar
So if start-up costs are > $55,000
there is no up-front deduction.
▪ Amortize remainder over 180 months
Website Development Costs – Existing
Business
p. 130
Ex. 4.8
 Ernie owned an antique store but his
business was dropping so he moved it
to the web.
 He hired someone to set up his web
site.
 The costs of developing the website
are deductible since he is maintaining
his existing business.
 But suppose he started a new business…..
Website Development Costs – New
Business
p. 131
Ex. 4.9
 Ernie owned an antique store but his business
was dropping.
 He decided to give up on antiques, sell art work &
have the art business done on the web.
 He paid someone $53,000 to set up his web site.
 Since start up costs exceeded $50,000 he must
reduce his normal $5,000 deduction by $3,000.
 He can deduct $2,000 of start up costs under
§195.
 The remaining $51,000 can be amortized over 180
months.
Beginning of Active Trade or Business
p. 131
 §195 costs are deductible in the month the
business begins.
 If an activity never becomes a trade or business
that “begins” the start up costs cannot be
amortized.
 In addition, if an activity never becomes a trade or
business that “begins” amortization normally
allowable over 60-months cannot commence.
 A new business “begins” when all of the needed
assets are acquired and in place for operation.
 An existing business “begins” when acquired.
Beginning of Active Trade or Business
p. 131
 Airplane Dealership / Aerial Photography:
▪ Franchise requirements not met in the tax year.
▪ Non-deductible start up costs & no amortization.
 Automobile Production:
▪ Looking into new types of auto & production failed to
prove activity had gone beyond exploration stage.
 Cellular Phone Company:
 Expenses not deductible where company was not yet
providing service to customers.
 Restaurant & Nightclub:
▪ Trade or business not begun until open to the public.
Beginning of Active Trade or Business
p. 132
 Rental Cabins:
▪ Cabins renovated but not offered for rent during the
year so no deductible start up costs.
 Software Development:
▪ Had one sale and had three developers working parttime throughout the year for the company.
▪ Held the business was beyond start-up and pre-opening
▪
( US Court of Federal Claims decision in 1997 )
 Tree Farm:
 Investigating tree farm activity was not a trade or
business that had begun.
Fruitless Searches for New Venture
Acquiring an Existing Business
 Speakers Comment:
 Individuals:
▪ Losses incurred on unsuccessful attempt to
acquire a business are deductible only when the
efforts were more than investigatory.
▪ Deduction is allowed if the taxpayer had
focused on acquisition of a specific business
and later abandoned the project.
 Corporations:
▪ Can deduct cost of searching or investigating a
new venture when efforts are abandoned.
Tax Return Reporting
 Speaker’s Comment:
 Deduction of start-up costs is an “Other
Expense”.
▪ Sch C for sole proprietorship
 Amortization claimed on Form 4562
▪ Then on Sch C for sole proprietorship
New Business Models &
Nontraditional Occupations p. 132
Gambler held to be in the trade or business
of gambling – Groetzinger, 480 US 23:
 Spent 60 to 80 hours a week at dog track.
 Activity engaged in on a regular &
continuous basis.
 Studied forms, programs & material to
become an expert.
 This was his sole occupation.
 Intention was to make living from effort.
New Business Models &
Nontraditional Occupations p. 132
Caglia, TC Memo 1989-143
 Gambling often involves cash and poor
records.
 Taxpayer presented credible evidence that
all deposited money was not income.
 IRS could not solely rely on bank deposit
method to determine income.
New Business Models &
Nontraditional Occupations p. 132
Observation:
 Gambling losses only deductible to the extent of
gambling gains.
 If not in a gambling trade or business losses are
deductible only as miscellaneous itemized
deductions not subject to 2% AGI limitations.
 If in a gambling trade or business expenses
(travel, meals, phone, internet) are not limited to
income even though gambling losses are limited
to income.
New Business Models &
Nontraditional Occupations p. 132
Observation:
 Gambling losses only deductible to the extent of
gambling gains.
 If not in a gambling trade or business losses are
deductible only as miscellaneous itemized
deductions not subject to 2% AGI limitations.
 If in a gambling trade or business expenses
(travel, meals, phone, internet) are not limited to
income even though gambling losses are limited
to income.
New Business Models &
Nontraditional Occupations p. 133
Fiduciaries
 Professional fiduciaries are always in the trade or
business and owe SE tax unless an employee,
 Non-professional f are not in the trade or
business unless:
1. A trade or business is included in the entity
(estate or trust) and
2. The fiduciaries are directly involved in the
trade or business and
3. The fiduciary fees are related to the operation
of the trade or business.
New Business Models &
Nontraditional Occupations p. 133
Creative Occupations:
 An artist and writer with 20-years of losses was
in a trade or business for profit.
 In the field it takes extensive time to become
known well enough to charge prices that will
generate a profit.
 Churchman, 68 TC 696 (1977)
New Business Models &
Nontraditional Occupations p. 133
Selling Personal Property:
 An IRS employee also sold personal property on
the internet.
 She argued she was not in business.
 Tax Court held she was in a trade or business,
▪ Allowed IRS’ reconstruction of income,
▪ Allowed some expenses even though not
proven and
▪ Imposed the accuracy related penalty.
 Orellana, TC Summary Opinion 2010-51.
New Business Models & Nontraditional
Occupations
p. 133 - 134
Services:
 Many businesses now offer services via internet.
 Uber and Lyft are companies that provide drivers
or essential taxi services.
 The California Labor Commission has held the
drivers are employees and that Uber owes
employment taxes.
 Uber appealed the decision on June 16, 2015.
 California uses factors like the IRS to determine
whether a worker is an employee or independent
contractor………..such as……….
New Business Models & Nontraditional
Occupations
p. 133 - 134
1. Uber controlled cars by requiring registration with Uber
and cars could not be more than 10-years old.
2. Uber monitored ratings and terminated if a driver was
rated below 4.6.
3. Drivers could hire others but only those approved by
Uber could use Uber’s intellectual property.
4. Passengers paid a set price and Uber pays driver a set
fee.
5. Only Uber could charge a client a cancellation fee.
6. Uber prohibits taking tips because it impacts its ads
setting prices.
7. Driver’s only investment is labor, car and iPhone.
Trade or Business References
pp. 134 - 138
These pages list Code Sections that involve, refer to or
impact the term “Trade or Business”…..For example:
Page 135 provides that §162 allows a deduction for all
ordinary and necessary business expenses.
Page 135 erroneously provides that §195 allows a $10,000
deduction for start up costs. The amount should be $5,000.
Page 136 points out that §280E prohibits deduction of
expenses of an illegal drug operation. AND that’s true in
States where drugs are legal because they are illegal under
Federal law - Comment – That is interesting and could create
substantial income from the drug companies in these States
Chapter 4 – Trade or Business