Ask the Editor — Questions on Hobby Losses, Medicare

Each week, our Ask The Editor Series, Joy Taylor, in Kippinger Tax Letter Editor, answers questions on the subjects presented by the readers. This week, she is looking at questions on hobby loss, I bond and medicare premium. ,Get a free marks or subscribe,

1. Hobby loss or trade loss

Question: I am the owner of a dog-breeding business, and for the last few years, I have reported a loss from business on a schedule of my form 1040. What is IRS that IRS will audit my return?

Joy Taylor: The possibility of IRS audit is quite low for most people. In recent years, IRS has audited less than 1% of all individual tax returns, and we hope that the number will be low for the future. However, there are some audit red flags that may increase the possibility of attracting unwanted attention from IRS. One of them is cutting hobbies damage. The filer who reports a large loss of many years on the schedule C of Form 1040, run an activity that looks like a hobby, and there is a lot of income from other sources that the offset prime IRS audit targets.

To cut the schedule C los, you have to show that activity is a business. It needs to be conducted with commercially continuity and regularity, and you must have a proper, good faith in earning profit from it. IRS rules provide a safe port. If your activity produces benefits in three out of three in three consecutive years (or two of the seven years for horse racing), the law is in business to earn profit until IRS otherwise establishes. Hobby-business analysis is complicated if you cannot meet safe ports. This is because whether an activity is classified properly as an hobby or a business is then based on the facts and circumstances of each taxpayer. IRS and courts typically see the following nine factors (note that no factor is determinant, but some are given more weight regularly):

• Expertation of taxpayers and advisors
• The way someone works on activity
• Time and effort is dedicated to enterprise
• Hopefully the property used in activity can appreciate
• The history of income and loss (large, more years of continuous loss, it is difficult to display the purpose of a profit until the activity is still in its start-up stage)
• Amount of topical profit
• Success in taking other activities
• Individual pleasures
• Does the taxpayer have adequate income from other sources, such as wages, other commercial income, retirement income or investment income