Blog Post by: Robert B. Teuber
Internal Revenue Code Section 183 limits the deductibility of expenses where the activity is determined to be a hobby instead of a business. These limitations prohibit a person from claiming losses from the hobby that exceeds the income from the activity. That is, a hobby cannot generate losses that offset other income on a tax return.
The reason that the hobby loss rules exist is to address the concern that taxpayers with substantial income from other sources will attempt to reduce their taxable income by engaging in an activity simply to generate losses that offset that income. For example, perhaps someone with substantial financial resources enjoys auto racing and spends a lot of money on the activity. The auto racing activity has no realistic possibility of turning a profit. That taxpayer might call the activity a business and attempt to reduce his substantial income (by claiming losses) and pay less tax.
The Treasury Inspector General for Tax Administration wrote in its 2007 report that approximately 1.5 million taxpayers filed a Schedule C with their tax returns showing only losses over the four year period 2002-2005. The report states that by claiming the losses, these taxpayers avoided paying roughly $28 billion in taxes in the year 2005 alone. This would seem to validate the IRS’ concern and likely explains the apparent increase in the number of hobby loss audits.
Unfortunately, in applying the hobby loss rules, some auditors seem to look past the basic reason for the hobby loss rules. By this I mean that the hobby loss rules are being applied against taxpayers without substantial income from other sources and to those that are not offsetting their taxable income by any meaningful amount. This means that even the proverbial “little guy” is getting caught up in hobby loss audits. Unfortunately, the way that the hobby loss rules are written allows this to happen.
“Hobby Losses” background post can be found here.
Blog Post by Anna M. Pepelnjak
Imagine this situation: An employer is sued by an unsuccessful candidate for failure to hire based on gender.
The employer solicited “resumes” for an open position in a local newspaper. Because of the high local unemployment rate, the employer received several hundred resumes. No “applications” for employment were required or taken. HR quickly looked through the resumes and eliminated 95% of the applicants because of education, relevant education, work experience and the like. HR then interviewed the people who were selected from the review of the resumes and made a decision on hiring. The employer did not keep any of the resumes, except for the resume of the successful candidate. That document became a part of his personnel file.
The EEOC now claims the employer is in violation of an EEOC regulation that requires employers to make or keep certain kinds of records. It looks like the EEOC is referring to 29 CFR 1602.14, which appears to require that these records be kept for a year.
Sec. 1602.14: Preservation of records made or kept.
Any personnel or employment record made or kept by an employer (including but not necessarily limited to requests for reasonable accommodation, application forms submitted by applicants and other records having to do with hiring, promotion, demotion, transfer, lay-off or termination, rates of pay or other terms of compensation, and selection for training or apprenticeship) shall be preserved by the employer for a period of one year from the date of the making of the record or the personnel action involved, whichever occurs later…
This company gets hundreds of unsolicited resumes as well as hundreds more in response to a job opening. It does not want to be burdened with keeping up with all these records and is not interested in settling with the EEOC over what it perceives to be a nonsensical requirement.
Here’s the interesting part: There does not appear to be a provision for enforcement in Sec. 1602.14. What happens if the employer just respectfully declines to enter into an agreement that will force it to keep these records?