Alice in Businessland

[Black Bart]

I rent out office space and occasionally get a landlord's inside look at tenants' businesses. Three weeks ago "Alice" called about a vacancy -- said she was "going in business." Now, I know Alice -- no scholar, it's a safe bet she's never balanced her checkbook. Hubby, a well-paid tradesman, is bankrolling this "Sharper Image"-style womens' clothing shop. Her investment (and I use that term very loosely) will immediately become a serious financial drain/strain. They paid me rent & deposit, turned on utilities, got a phone; even framed their city permit. They're now officially in business and out $1,500.

The thing is, it's hopeless. This Podunk Junction already has one well-established ladies' clothier (in a typical small town, there's no room for two) catering to the few well-to-do. The last competitor closed in 1980 and whittled on a $25K bank note for the next five years.They've got three months, six at best, 'til reality dawns. Over the years I've seen so many small shops like this go belly up that I just want to grab her by her upscale lapels and scream "Look, you dope; don't do this! You're gonna be out thousands for nothing." But...she hasn't asked, and doesn't feel the need, for advice.

UPS brings pricey garb daily and Alice is gearing up for the "rush." While she can't carry Penney's, Dillard's, Goldsmith's huge selections, she nevertheless feels the public will recognize "good taste." My take is; today (after the stock market crash), if you're not in food, beer, death, law, or taxes you're in trouble. Alice is fantasizing that people cutting back on food and drugs will cough up $150 for a spiffy dress and $35 for a belt to match. Also, the newly remodeled unit's colors "need tweaking" and, let's see, what else? Oh yeah, she (a later riser) will open at 11 A.M. ("A person who's now their own boss can cut herself some slack"). Other notes: she hasn't mentioned sales tax and I'm not sure she's aware it exists, so I'm not touching that -- anyway I'm thinking sales may be absolute zero anyway and no tax due (everything will eventually go to a flea market for $1 to $5).

The American dream to "own my own business" never dies (thankfully), but it's just so much harder than it once was. Main Street micro-shops flourished until Sam Walton started selling merchandise (sixties wasn't it?) cheaper than they could buy it. Good thing we're in a service business (although Turbo Tax is hot on our heels).

[Bees Knees]

You have completely missed the point.

Alice is not in business to make money. Hubby makes all the money they need. This dream shop he is bankrolling for her is worth every dime. She gets to do the hobby she always wanted. He knows where she is during the day.

I have several clients where one spouse makes all the money, and the other is kept busy doing some business that losses money every year. And it isn't always the husband making all the money and the wife doing all the spending. They are all perfectly happy with the arrangement.

[taxmandan]

Bees has this correctly pegged, it's a hobby to keep her busy. We have several of those type of stores in our town and they pass from one wife to the next one every couple of years, more because they get bored than they are losing money. They are clueless about business 'stuff' but it really doesn't matter to them, they're having fun.

[joanmcq]

But can you deduct the losses?

[Black Bart]

You have completely missed the point.

I don't think so. He's not an affluent high-roller humoring a poor little rich girl.

Alice is not in business to make money. Hubby makes all the money they need. This dream shop he is bankrolling for her is worth every dime. She gets to do the hobby she always wanted. He knows where she is during the day.

Alice is in business hoping to make money and the above speculations don't apply. Hubby's a frugal hard-worker who thinks his wife is smarter than she is and will make them an extra "salary". He'll be crushed when she quickly loses $10K or so.

I have several clients...one spouse makes...the money...the other is kept busy...losses money every year...They are...happy with the arrangement.

Maybe it's a regional thing, but "play-business" shops are non-existent locally -- slackers and incompetents get wiped out and closed PDQ (as this one will soon be).

[erchess]

My Understanding is

But can you deduct the losses?

that the only people at risk of being told they have a hobby instead of a business are the Sch C Filers. I believe that creating an entity creates a presumption of profit motive.

[JohnH]

Cut her a little slack here, Bart.
After all, when you don't get paid in profits, you still get paid in experience.
Maybe she & hubby will get an education in business management...

[Davc]

that the only people at risk of being told they have a hobby instead of a business are the Sch C Filers. I believe that creating an entity creates a presumption of profit motive.

If so, it's a rebuttable presumption. The IRS and the courts have applied the hobby loss rules to Corps.