Entertainers

[Don Hughes]

I have a client that has set up an LLC for their "competition dance business".

How long can an entertainment business operate at a loss? They never expect a profit, based on taxpayer estimate.

Should be a hobby. Since there is an LLC, can an LLC be the tax reporting form for a hobby, seems not likely. 

[DANRVAN]

LLC is a disregarded entity and subject to Hobby Loss rules.

[Corduroy Frog]

Hobby is a bad deal.  Even though you can't take a loss, you still must claim gross income as "other income" without deducting any expense.

And yes, it is taxable.

[Abby Normal]

8 hours ago, Corduroy Frog said:

without deducting any expense

Not true. You can deduct cost of goods sold, but in this case, there are no goods.

[mcbreck]

"The IRS will only allow you to claim losses on your business for three out of five tax years." I tell people we can take a loss for 3 years and I've lost multiple clients in year 4.

[Lion EA]

The 3 out of 5 (different for horses) is a safe harbor. Within that, the IRS would have to prove you're not a biz. Outside the safe harbor, the biz has to prove they're a biz using the IRS factors and other reasonable issues. It's possible a biz is changing to get out of losses or that the losses were due to natural disasters and take time to rebuild or...for more years.

We usually can tell when our clients are just dabbling and it's a hobby.

I had an artist who worked hard on her art and on her biz, memberships, shows, sales. But over the years, she got busier with her kids and seemed to be treating her art less businesslike. We had a chat about 3 out of 5 and IRS scrutiny, and changed her treatment to a hobby.

[DANRVAN]

1 hour ago, mcbreck said:

The IRS will only allow you to claim losses on your business for three out of five tax years.

I don't believe that is correct statement.  

Under section 183(d) there is a "presumption" that the activity is for profit if  gross income exceeds expenses for three out of five years.

Meeting the 3 out of 5 year rule is not  a slam dunk.  Presumption is the key word.  For example you cannot shuffle income and expense around to show a meager profit.

[DANRVAN]

1 hour ago, mcbreck said:

I tell people we can take a loss for 3 years and I've lost multiple clients in year 4.

You can't unconditionally take losses for three years in a row.

[Abby Normal]

If you don't ever expect a profit, it's a hobby. Nothing else matters. They're not selling anything, they're competing for prizes. Not a business until they get good enough to win big prizes consistently and turn a profit.

[schirallicpa]

I feel like this is kinda like stock car racing.  A big no.  It's a hobby.  But I am wondering if the LLC isn't a good idea in case of legal action.  Then the personal assets are protected.  So this is why they want an LLC, but it is not really a business. I have a client that set up LLC for his stock car racing.  Of course it's nothing but a grown up play toy.  I have another client that has set up a recreational building for members of our community to play indoor soccer or basketball in the winter, or practice baseball and softball.  He got himself an LLC.  Again - never expects to make money and only takes money from vending machines.  I don't know what to do with their LLCs other than pay NYS their $25.  

[Corduroy Frog]

I think the critical factor on deducting losses is the intent of making a profit, if not currently, an intent to stay in business long enough to make a profit.  I believe this factor is so overwhelming that little else matters.  The 3 in 5 is an IRS guideline (and a guideline they would be very happy to apply).

Of course, the client will always claim the profit motive is there, but the practitioner must use judgement.  One good sign is if losses are declining over time, or losses can happen in economic situations (such as pandemic).  Example:  I had a building contractor suffer losses in 2021 when the price of lumber went up exponentially on fixed price contracts.

Farmers have a longer leash, and an ultimate sale of farmland will usually overwhelm years of farm losses.  And not working farmland productively will ultimately ruin the value of the land, unless timber is grown.

Some claims of profit are ridiculous, such as horse breeding.  I have lost some clients because they have insisted on claiming large and ridiculous losses.

[Don Hughes]

Thank you all!!!