Question

Rachel Schutz 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 2018, 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 2018, Rachel reported a net loss of $375 from the activity. In 2019, she reported a loss of $460. Rachel is audited for the year 2019 and the agent disallows the $460 loss. Rachel is pretty sure she will make a profit on her sales in 2020, and she assumes she will continue to make a profit after 2020. 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

Rachel was using her spare time to make her own body lotion, lip gloss and bath and shower gels and gifting her relatives and her friends. Since 2018 she started using her business card, attending arts and crafts festivals to sell her products, these activities show that she was pursuing it more like a business than hobby. She has generated losses in two straight years , however is confidant that from next year (2020) on she is likely to generate profit. The determination whether an activity is engaged for profit depends on facts and circumstances and is very subjective, however a statutory safe harbor is provided that,if met,causes a presumption that the activity is for profit motive. To meet the safe harbor, the activity must generate profit in at least three of five years. Rachel can delay proving it to the IRS because she is in the second year of business. She has the safe harbor so the burden of proof for the lack of profit motive is shifted to the IRS.