The GM Financial Group, LLC
A seasoned family and small business wealth advisor with over 25 years of experience, Guy McPhail, President of The GM Financial Group, LLC, is well-versed in the financial needs of individuals, couples and small business owners. Guy has the certifications required to offer a complete range of financial solutions including financial planning, discretionary portfolio management and proactive tax planning. He is a Certified Financial Planner Practitioner(CFP®), a Certified Public Accountant/Personal Financial Specialist (CPA/PFS) and Certified Tax Coach.
Guy is an author and has written numerous articles on financial planning, investments, and income taxes. He has been quoted and written articles in publications such as Entrepreneur Magazine, MSNBC, Fox Business, The New Jersey Star Ledger, New Jersey Life, Mutual Fund Magazine, New Jersey CPA Magazine, Medical Economics, Worth, Small Business Review, FiLIfe in partnership with the Wall Street Journal and more. Guy also was co-author of the Amazon best-selling book "Tax Breaks of the Rich and Famous". A book on how to reduce taxes for small business owners.
Guy is also an educator and mentor. He was the past leader of the New Jersey Society of CPA’s Financial Planning Interest Group, he consults and leads webinars at the New Jersey Small Business Development Center and is on the faculty of Lawline where he instructs attorneys on tax laws and other financial matters.
Guy is a member of the National Association of Personal Advisors (NAPFA), The American Institute of Certified Public Accountants (AICPA), and The New Jersey Society of Certified Public Accountants (NJSCPA). Guy also participates with the Princeton Regional Chamber of Commerce and serves on the board of the Pennington, NJ Economic Development Commission, the Pennington Business and Professional Association (PBPA) and Friends of Alouette International.
Assets Under Management:
Fee-Only (Member of NAPFA)
Tough Questions to Ask Financial Advisors Guy McPhail HD
Proactive Tax Planning Guy McPhail HD
Investment Mistakes Guy McPhail HD
I am assuming your question is in regard to taking losses on your tax returns and IRS regulations. There are general guidelines around how long you can take losses, but if you can prove you had a profit motive you may be able to take the losses for more than the general guidelines dictate. I have helped clients do this in the past when they have received a letter from the IRS disallowing the loss by explaining the business and profit motive.
The general overview is this which I have taken straight from the income tax handbook. Let's say your business claims a net loss for too many years, or fails to meet other requirements, the IRS may classify it as a hobby, which would prevent you from claiming a loss related to the business. If the IRS classifies your business as a hobby, you'll have to prove that you had a valid profit motive if you want to claim those deductions.
The IRS allows you to take a tax deduction for legitimate losses incurred in the operation of your business. However, if your business claims a net loss for too many years, or fails to meet other requirements, the IRS may classify it as a hobby, which would prevent you from claiming a loss related to the business. If the IRS classifies your business as a hobby, you'll have to prove that you had a valid profit motive if you want to claim those deductions.
The IRS expects that if you start a business, you intend to make money at it. If you don't, your business is likely to be a hobby. To determine if your business is a hobby, the IRS looks at numerous factors, including the following:
Do you put in the necessary time and effort to turn a profit?, Have you made a profit in this activity in the past, or can you expect to make one in the future? Do you have the necessary knowledge to succeed in this field? Do you depend on income from this activity? Are your losses beyond your control?
If you have not turned a profit in at least three of the prior five years, the IRS will categorize your business as a hobby. This may be extended to a profit in two of the prior seven years in the specific case of horse training, breeding or racing. This is, presumably, because these endeavors involve a great amount of risk.
Consequences of being called a hobby:
Generally, the IRS classifies your business as a hobby, it won't allow you to take any losses. However, in certain limited situations you can use your hobby expenses to reduce your taxes.
If you have a hobby loss expense that you could otherwise claim as a personal expense, such as the home mortgage deduction, you can claim those expenses in full. Other expenses, such as advertising, wages, insurance premiums, depreciation or amortization, may also be usable. However, you must have earned more total income in your hobby than the amount of all of these deductions, including your personal deductions. In that scenario, it's likely the IRS would categorize your hobby as a business anyway.
Preventing your business from being classified as a hobby:
Running a hobby as a business could very possibly trigger an IRS audit. If your business is legitimate, keeping accurate and extensive records could help prevent the classification of your business as a hobby.
In addition to demonstrating your professional approach to your business, records and receipts can help document your profit motive. A written business plan is often a prerequisite for indicating an intent for profit, and it can also show ways in which you are modifying your business to cope with losses
Make sure you keep your personal and business expenses separate also (don't co-mingle):
Hopefully these guidelines will help you however you can always try to prove your profit motive if you go over what the general rules state and win if the business is legitimate.