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Anne
Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 2421
Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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I operate a cattle ranch for profit. I had a loss in 2009,

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I operate a cattle ranch for profit. I had a loss in 2009, 20010, 2011 and now in 2012. Using the IRS rule of showing a profit in 3 out of 5 years I have now exceeded that time frame by two years. I can make adjustments to my operating process in order to show a profit in 2013 and forward. Can I amend my 2011 tax return, pay any back taxes, etc.. then still count 2012 as my first year in a five year profit venture? In other words can I start the clock over again by amending my 2011 return and not amend my 2009 and 2010?

Anne :

Hi

Anne :

Thank you for using justanswer

Anne :

The rule of thumb that you should show a profit in at least 1 year out of 3, or 2 out of 5 is just that, a rule of thumb

Anne :

I do not mean to imply that there's no merit to it. The IRS can (and has) disallowed business expenses and ruled the activity a "hobby"

Anne :

But there's more to it that that.

Anne :

The IRS looks at a variety of factors when they make a determination of whether or not something is really a business or if its a hobby.

Anne :

Most importantly, did you TREAT it as a business

Anne :

Did you advertise.......do you have a business account (not co mingled with your personal checking account) do you have a website or business cards (again, this is more advertising.)

Anne :

Here is a web site that offers at least 8 other points that the IRS looks at. I think its important for you to understand how something can be reclassified as a hobby, and JUST having a loss in multiple years is not the only factor

Anne :

Also, keep in mind that things such as depreciation and mileage can cause what we call a "paper loss" which the IRS is a little more forgiving on.

Anne :

Here the website I mentioned:

Anne :

http://www.irs.gov/uac/Business-or-Hobby%3F-Answer-Has-Implications-for-Deductions

Anne :

 


I truly hope this information is helpful but please do not rate until you are satisfied. If you want to click on 1 or 2 just click on the continue to work with me button instead. You will then be able to add any other info or respond to what I have posted so far. Rating 3-5 gives me credit and a good rating but you can still converse with me.


 

Customer:

I understand all of that and I am weighing two courses of action. The first course of action is to complete a form 5213 and explain my circumstances or 2. amend my 2011 taxes and not take the farm (schedule F) deductions. If my assumption is correct this would then restart the clock on my 3 / 5 rule. Please answer the original question.

Anne :

IRS has ruled that if a tax payer has a business (farm, ranch,), NOT taking the allowed deductions could be ruled as fraud. So if you amend the prior year return, and take out your Sch F deductions , so if you choose to amend, you need to understand that you will run a high risk of auditt

Anne :

That being said, your other choice is to file the Form 5213

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