Question

Which tax codes and regulations pertain to horse showing businesses with only expenses and no income?

Answer 1

Section 183 of the Internal Revenue Code provides that if a horse business engaged in by an individual, partnership or subchapter S corporation shows a profit in two years within a seven year period (beginning with the first profit year), it will be presumed to be engaged in for profit, with a separate special election available for a new enterprise. If the activity is one engaged in for profit, then losses resulting from the business may be deducted from other income.

However, the two-out-of-seven presumption is not absolute. There is no negative presumption in the rule. Even if an activity does not have two profit years during a seven year period, it is not necessarily a hobby; the burden of proof is merely shifted to the taxpayer to prove he entered into and/or continued the activity with the objective of making a profit.

Conversely, two profit years occurring during the seven year period do not assure that the IRS will not consider the operation to be a hobby if the profits during those two years are minimal and the losses were substantial.

The regulations list nine objective factors, which will be taken into consideration in determining whether an activity is engaged in for profit. No single factor is controlling, and the IRS and courts do not reach a decision solely by comparing the number of positive factors versus the number of negative factors.