Many authors and other self-employed business owners seem to think that if they suffer years of losses, their business will be classified as a hobby (which is quite punishing from a tax perspective).
But, I always explain that a business can have years of losses and still be considered a legitimate business.
Here’s an excellent example:
A jazz musician in Wisconsin, Thomas Gullion, had businesses losses in 2004 through 2010 and in 2011 showed a small profit.
The IRS wanted to declare his music as a hobby (he had a day job as a computer programmer) and not allow him to deduct his businesses losses.
Fortunately, he had excellent records and could show he had a profit motive including an advertisement, a depreciation schedule, a press kit from his website showing his musical activity and a mileage log. Source: http://www.ustaxcourt.gov/InOpHistoric/GullionSummaryKerrigan.SUM.WPD.pdf
He fought and he won! The Tax Court decided in his favor. Congratulations Tom Gullion!
The Court stated:
“We have recognized that a taxpayer may engage in more than one trade or business at any one time. It is also well settled that the term ‘trade or business’ includes the arts… We have found that ‘a history of losses is less persuasive in the art field than it might be in other fields’, as economic success in the arts frequently takes longer to achieve than success in other fields [Churchman v. Commissioner, 68 T.C. at 701-702].”
My friend and fellow tax professional, Gary Hensley, sees this as good news for authors:
This case makes clear that documenting all your efforts and activities en route to a profitable business as a writer, author or illustrator will be the key to deducting your annual losses until that is achieved.
So, keep good records to prove you have a profit motive and you can deduct those businesses losses.
Unsure of what records to keep? Read Chapter Eight: Organizing Business Records in Business Tips and Taxes for Writers.
Carol Topp, CPA