By Jason Watson (Google+)
In a proceeding brought to the Tax Court under Docket 21600-11S filed October 25, 2012, a track coach in Oregon reported consecutive losses on eight tax returns starting in 2003. The IRS examined three tax returns starting with 2006, declared the track coach’s activity a hobby and disallowed his losses.
Under tax law, when an activity is not trying to earn a profit, it is considered a hobby and not a legitimate business, and therefore a taxpayer can only deduct the losses to the extent of the earnings. This is similar to gambling- taxpayers can only deduct gambling losses to the extent of gambling winnings.
In this proceeding, the taxpayer approached his coaching in a businesslike manner by actively advertising and seeking ways to improve his business. Specifically the coach was traveling to more track meets and attempting to connect with more potential clients. He also paid for the advice and counsel of other professional track coaches.
The time and effort spent by the taxpayer was also considered. According to court documents, the track coach spent substantial time outside of his normal teaching job on the coaching activity. Further, the taxpayer’s marriage and personal life were negatively affected by the time spent, and this supported the Court’s contention that his coaching business was trying to earn a profit.
The Tax Court also determined that the expenses from the private coaching activity were not purposely used to reduce taxable income. On the contrary the taxpayer’s losses actually created a financial hardship to the coach by reducing his income for basic living expenses. Further, while the taxpayer enjoyed teaching and coaching, the activity was not based in personal pleasure or recreation.
Most tax professionals would be reluctant to allow eight years of consecutive business losses and subsequent tax deduction. Yet all these factors led the Court to label the professional track coach’s activities a legitimate business and not a hobby, and therefore his losses were allowed to be deducted.
Read the full opinion at wcginc.com/Coach.pdf.