Starting a Mortgage Company but I need to know when the Hobby Rule makes me unable to deduct the loss?

Question

The IRS has a "Hobby Rule" make money 3 out of 5 years.
What happens if you lose money 4 of 5 years? or lose 5 of 5 years. If you own a yacht charter fishing business, that is one thing but what about a startup company like Mortgage that is not fun!

Answer 1

The hobby loss rules are not hard and fast rules. The IRS leaves a lot of room for interpretation in determining whether a business is considered a "hobby" subject to the hobby loss rules. You really have to look at the facts and circumstances of each particular case to see whether the IRS will consider the business a hobby or a true business. Some of the facts they may consider is:

1. Do you have a storefront (i.e. separate business location) and not working from your home?
2. Is this your sole source of income or do you have a "day job" to pay the bills?
3. Does the business require a specialized license (i.e. real estate license or certification) or specialized knowledge?
4. Is the business set up as a "true" separate entity (also covers separate business location, separate business accounts, DBA license, paying payroll taxes, etc.)?

Answer 2

If you can show that the losses are related to starting up the company or that it is normal for a company like yours to lose money year after year, they MAY allow the loss.

Also, you should be able to show that you have changed your business practices to become profitable.

Hobby vs Business losses are going to be a major point of emphasis for the IRS in the next few years. Disallowing deductions is a great way to raise revenue without raising taxes.