Have Tax Questions? Ask a Tax Expert for Answers ASAP
Thank you for using justanswer
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
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"
But there's more to it that that.
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.
Most importantly, did you TREAT it as a business
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.)
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
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.
Here the website I mentioned:
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.
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.
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
That being said, your other choice is to file the Form 5213