- quote -

One other consideration in a case like this may be using a
different accounting method, in this case "completed
contract" method - you would of course need IRS approval to
switch methods - but with "works in process" cases like
authors this can be a better way to report the income when
received at publication and deduct all the expenses,
regardless of when incurred against that income.

This method has worked just fine with one of my clients.
He's a home remodeller and not an author, but his modus
operandi is that he buys a house in ill-repair, moves it to
a new location and completely redoes it. It takes hime
anywhere from 1 1/2 to 3 years to complete a job and so we
report the income when he resells the completed home and
deduct all the expenses incurred during the period of
reconstruction.

Dave M

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Depends on all the facts and circumstances (ain't that a big
help?).

What you're gonna be running up against is section 183,
which disallows a lot of business deductions to the extent
they exceed income from the activity in question (i.e., a
"hobby"). The IRS will look at factors like the degree to
which the client holds herself out to the public (or to the
publishing houses) as being in the trade or business of
writing; the degree to which she keeps books and records, a
ledger, and otherwise conducts her affairs in a
business-like manner, and also the degree to which she
actively seeks to make a profit (e.g., bargaining for more $
where feasible) as opposed to just settling for getting her
costs back.

What you run into with sec. 183 is the presumption that, if
the income from an activity for at least 3 years in the last
5 years has exceeded the losses, then the activity is not a
"hobby." In other words, the presumption is designed to
turn activities into businesses, not the other way 'round.

In your case, depending on whether or not the client
continues to run everything else in a business-like manner,
she's only had two negative years (2001 and 2002) in the
last 5 years (I don't know if there's a separate rule for
start-ups, but even if we include the first two years before
she started writing, her losses did not exceed her income
(both were zero) so those years should not count against
her), and thus she should still be presumptively engaged in
the business of writing.

Remember, however, that the rule is only a presumption, and
even if you lose it (i.e., you've been operating for 10
years and never had a profit, but you've been extremely
business-like about it) you still get a shot at being
treated as a business under the general rules of sec. 162
and the regs thereunder.

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Many tax professionals will say that a taxpayer should show
a profit in 2 of the last 5 years, but this is a myth. As
long as facts and circumstances support your friend's
contention that she is running a legitimate business, it's
acceptable to show losses for many consecutive years.

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Avrum Lapin wrote:

- quote -

Technically: When they say so.

The real question should probably be: At what point does
the client [or you] feel that the position is indefensible
as a business?

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Client is employed part time as a writer. In 2001 she had
writing income and expenses and filed a scheduke C showing
net income. In 2002 she had less writing income and filed
Schedule C showed a net loss. In 2003 she continued to
write but sold nothing (had no income) but still had
expenses and so filed schedule C and took the loss. 2004 was
no better than 2003

At what point would the IRS consider that the writing is now
only a hobby and she could no longer take the loss

--
Avrum Lapin avrum113[at]earthlink.net
Upland CA Remove NOSPAM from address

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->