Question

Your favorite client, Mr. T, tells you that in 2019 he finally turned his longstanding meteorite hunting hobby (something he’s loved since he was a kid) into a “real business.” You ask a few due diligence questions and find out the following:

• Over the past few years Mr. T has found around 50 actual meteorites.

• He has sold only four of those, at prices ranging from $8,000 to $15,000; his other “finds” he’s kept even though there is a ready market for them.

• In addition to travel, Mr. T’s major outlays have been for high-tech metal detectors and etc. equipment – around $20,000 over the past few years.

• He does keep very careful books and records.

• To facilitate his “search time” he cut his hours at the plant (his “day job,” which he hates) during the nice-weather months and made up the time during the horrible-weather months; he has not and does not plan to quit, however, because he likes the medical insurance, group life insurance, and other benefits.

Toward preparing his 2019 tax return, what is your analysis and conclusion as to whether Mr. T now has a “real business” vs. just a hobby

Answer 1

According to the tax laws, the intention of setting up the business plays a significant part in determining whether the activity is real business or just a hobby. If the business is set up with the intent to earn profits, it is considered a business, and expenses can be deducted to offset other income. However, if it is a hobby, expenses cannot be deducted.

In the given question, though the person maintains clear records of all the transactions, his intentions of setting up the business do not appear to make profit. This is because of the following reasons:

- He does not sell other meteorites even though there is an active market, thus maintaining a stock of 92% of his finds.

- Major outlays include only direct equipment and nothing towards sales expenses.

We can conclude that the person did not set up the business with the intent to earn profits. He has set it up as a hobby.

Hence, Mr.T has no real business and only a hobby under Tax laws.