Not for Profit Activity

[Mark Goldberg]

On page 4 of the June NATP TAXPRO there is an article about a Schedule C filer who lost a tax court case because he was not engaged in the business for profit. The article says
he was only allowed expenses to the extent of profit. This says to me the Court allowed him to report income on Schedule C and expenses on Schedule C to the extent of income. I would ahve thought he would need to report income on Form 1040 line 21 and deductions on Schedule A subject to 2%. The case is David M. Sears et ux. V. Commissioner, T.C. Summary. Any thoughts?

[supeheterdyne]

Not for profit

I believe that if a venture is not for profit, it must be a hobby. As such all income and
expenses would be completely disregarded and not reported on the tax return at all.
After all we are not expected to report bowling, golfing, stamp collecting, etc. expenses
or even income IF they are a hobby and expenses exceed income.

[supeheterdyne]

more not for profit

After posting my first comment, I searched the internet and found several sites which
state that hobby expenses are deductible on Schedule A, subject to the 2% AGI
limitation. That makes no sense to me since that could possibly allow a deduction, if
income is low enough; for what are entirely personal hobby expenses. I have never seen
or heard of a taxpayer who reported such hobby expenses on a return. What do you
other experts think ?

[SUPERHETERDYNE]

even more not for profit.

Page 5-22 of the 2005 TaxBook provides the answer and much information.
Page 6-12 of the 2004 QuickFinder also provides information. Main points are:
Schedule C or F is NOT required. Hobby income is reported on line 21 of form 1040 after
a deduction for COGS. Expenses are deducted on schedule A, subject to 2% of AGI,
but LIMITED to the amount of hobby income reported on line 21 as hobby income.
No carryover is allowed. What about SE tax ? Page 5-22 says occasional profits from
the hobby are not subject to self-employment tax. What if it is not occassional but there
is no profit ? Then there is no SE tax, right ? Thank you Mark Goldberg for bringing this
issue to our attention.

[Jesse]

I would ahve thought he would need to report income on Form 1040 line 21 and deductions on Schedule A subject to 2%. The case is David M. Sears et ux. V. Commissioner, T.C. Summary. Any thoughts?

I read this article too, and the same thought entered my mind - Why wouldn't the deductions go on schedule A?

[Unregistered]

They may very well have been placed on Schedule A by the IRS.

The Court did NOT allow the expenses - the IRS did. The record from the case is not clear but the Court only looked at whether the activity was engaged in for profit. The IRS had ALREADY made adjustments and the footnotes indicate some adjustments for interest and taxes were done on Schedule A. The Court changed none of the adjustments.