Tax Court Denies $187k of Business Expenses for a Side Hustle

Today I'll share a story from a recent Tax Court case highlighting the importance of making a profit when running a business.

 Otherwise, you risk losing all of your deductions.

There was a woman named Debra who was a teacher. But she had a side hustle where she called herself a "writer-researcher."

 Debra was an aspiring author who had dreams of getting her books published and she took lavish trips to help inspire her writing... which she had been doing since the 1990s.

And these trips were awesome - $20k a year for Disney, Hawaii, Florida, and California, you name it.

Problem?

She deducted these trips, along with other expenses, as business expenses related to her writer-researching activity.

But the IRS eventually caught up to her and audited her 2018, 2019, and 2020 returns. 

During the years at issue, Debra made $1,045 but wrote off business expenses of $187,012.

The IRS claimed Debra didn't have a real business and disallowed all of the expenses. But Debra disagreed.

 She was very invested in her writer-researcher activities - so she took the IRS to Tax Court.

Once in Tax Court it was revealed that Debra's published books were only 2 pages in length each and her published articles were primarily TripAdvisor reviews and social media posts.

The Tax Court assessed 9 factors to determine if her writing was truly a business engaged in for profit, or if these expenses were merely personal:  

 1. Manner in which activity is conducted  

2. Expertise of the taxpayer and their advisor  

3. Taxpayer’s time and effort.  

4. Expectation of appreciation in value  

5. Success of taxpayer in carrying on other similar activities  

6. History of income or losses  

7. Amount of occasional profit  

8. Taxpayer financial status  

9. Elements of personal pleasure or recreation  

In the end, the Tax Court found Debra was not running a writing business and her expenses were for her own recreation. She had no real intention to make a profit.

The Tax Court assessed back taxes of $27,869 and penalties of $5,575. 

The lesson? If you have a side hustle, it needs to make real money. You can't just "write off your life"

Source: Brandon Hall, CPA