Hobby v. Business determined based on how records were kept: TC Memo 2010-92
If you think you have a viable ongoing business with a profit motive be sure to maintain adequate financial records on a computer that you back up off site on a regular and consistent basis. Also be aware that in the tax court case of Chandler v. Commissioner (TC Memo 2010-92) the significance of inadequate hand kept records was a major determining factor in ruling that the tax payer’s horse breeding business was actually a hobby and not a business.
Even though the tax code states that handwritten records are an acceptable method for maintaining the accounting books as long as the records are accurate and provide substantial information for the taxpayer to prepare the tax return [Reg. §1.446-1(a)(4)], the tax court’s determination as drafted in TC Memo 2010-92 compels me to ALWAYS recommend the use of bookkeeping software.
In this case the IRS issued a deﬁciency notice citing lack of proﬁt motive under §183 for horse breeding, training and racing activities. The IRS also determined Jo Anne, the tax payer, was liable for a §6662(a) accuracy related penalty in regard to maintaining adequate books and records for her horse breeding and training business.
The Tax Court determined the handwritten records Jo Anne kept
did not prove to be accurate or substantial. The Court also found
Jo Anne was able to reduce taxable income by approximately 40 percent for the years in question by claiming losses on her Schedule F relating to the horse breeding and training activities. Because the taxpayer did not provide the Court with adequate records and was unable to prove she was engaged in these activities for a proﬁt otherwise, the dis-allowance of the deductions under §183(a) increased Jo Anne’s tax liability and she was held liable for the tax along with interest and penalties for the years under review.