[mr_luc]

I can't believe it wasn't possible to do this all along!

I mean, what the hell.

Are you telling me that if I earn $50k at one job, but lose $25k with my LLC, the IRS wanted to tax me on the full $50k? Was, up until this ruling?

What the hell?

Generally speaking, the US is a good place for business. I know that. But I look at stuff like this, and then the self-employment tax on top of income tax, and I go: what?

Don't rules like that only punish good, honest people anyway?

I like how, at the end of the article, they mention that lots of people get out of the self-employment tax by showing their partner status in an LLC. WHAT? Is that legal? What does that even mean?!?

[asmithmd1]

How about this example: I earn $500k in my job as VP HR at MegaCorp. I also own 50% stake (my wife owns other 50%) in : Lake Front Home rental LLC, Sail boat charter LLC, and Thoroughbred Riding LLC. All of those "businesses" my wife operates and have a tiny amount of sales but lose money hand over fist. Now do you think LLC losses should be able to offset regular income?

[eru]

In Germany we have a special clause in the tax code to prevent your examples (see http://de.wikipedia.org/wiki/Gewinnerzielungsabsicht). If your business loses money for a long time, you have to justify that you are in the business to make money, not as a hobby ("Liebhaberei").

[kirse]

you have to justify that you are in the business to make money, not as a hobby ("Liebhaberei").

The IRS operates the same way here, otherwise everyone would be starting up "businesses" for their various hobbies and deducting as much as possible. The Nolo book "Home Business Tax Deductions" is a great primer on all the specific steps one needs to take to ensure their business does not get classified as a hobby by the IRS.

Ultimately if you really have the genuine intent of running a business, you're going to have plenty of evidence to indicate that. But for those curious, I read/own this book and it was very helpful: http://www.nolo.com/product.cfm/ObjectID/0EB8204C-4889-4C7B-...

This is usually not a concern for most startups, but for people who might be trying to turn their passion/hobby into a money-maker this is a useful guide to ensure you don't get burnt.

[mr_luc]

From another poster's comment, it appears that I just didn't understand the article -- that it's always been possible to deduct for losses, but the question was, who's an ACTIVE investor. So I guess in MY hypothetical, I'd have gotten taxed on $25k, not $50k.

As to your hypothetical, though, my curiosity is piqued:

Let's say the Household's businesses are losing $250k a year of the Household's money.

Why should they pay tax on $500k of income? Their income is $250k in your hypothetical.

If the businesses ARE losing money, then the household as a unit has less income, so why not tax the household on its actual income?

[sokoloff]

The point was they have to be profit-seeking businesses not just hobby tax dodges.

If I spend $10K on improvements to my daily driver classic Mustangs, I shouldn't be able to deduct those expenses. If I was a business engaged in restoring them for re-sale, then those expenses should be deductible.

Grandparent's point was if husband makes a ton of money at his day job, that his wife shouldn't be able to call their hobbies of sailboating or horses or their vacation house that they rent out to friends one weekend a year as "businesses" that lose money and as a result make those expenses payable with untaxed income.

[patrickg-zill]

My understanding was that in order to avoid the "hobby" classification you have to make money in 2 out of 5 years (this ratio might be different from what I remember).

[DenisM]

From the article it seems that the case was about more accurate defintion of who is passive and who is active investor. Active investors are able to deduct, while passive are not. For example, VCs are passive investors in your startup.

It seems that this ruling has expanded the definition of the active investor beyond where IRS wanted to see it.