You may think of your Mary Kay, Pampered Chef or Avon business as a, well, business… but does the IRS?
Tax Resolutionaries reports on an important tax ruling that could affect you and your business. Or hobby:
Ladies, this is one that you need to take great heed from. Before you invest in all those Pampered Chef, cosmetic sales and even “pleasure toy” shows, you might want to talk with Brenda Konchar, a Mary Kay Cosmetics representative who took her case before the Tax Court in Ralph D. Konchar, et ux. V. Commissioner, Tax Court Summary Opinion 2004-59.
Brenda Konchar reported net losses on Schedule C for her Mary Kay activity in 1996, 1997, and 1998. The IRS disallowed the business losses, since the activity was not a trade or business entered into for profit. It was a hobby. Furthermore, even if the activity had been conducted with a profit motive, most of her business expenses could not be substantiated.
Under §183(b), if an activity is not engaged in for profit, expenses are generally only deductible to the extent of the gross income from the activity. The deductions that exceed gross income cannot create a business loss.
An activity is conducted for profit if deductions are allowable under
1. §162 as ordinary and necessary trade or business expenses; or
2. §212 as expenses for the production or collection of income.
Under either section, the taxpayer must intend to make a profit. Whether an activity is conducted with a profit motive is based upon all relevant facts and circumstances.
Under §1.183-2(b), the Courts consider nine nonexclusive factors to determine whether an activity is engaged in for profit:
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