Doing tax for my son (25) here this weekend. He has an ocean fishing charter business. Florida.
He juuuuuuust started it up in the last month of 2019.
Then 2020: All tourists left in March/April or so. Ghost town, and ghost beaches.
No-one around for months !
I think he will show a loss for 3 consecutive years.
However, he worked superhard and managed to overcome a few major set-backs in those first two, three years.
1-The Covid - biggie.
2-Another biggie: a major boat-breakdown and a crummy, crummy, rip-off mechanic and marina, who took advantage of him being so young, and who kept the boat for more that 3 months, barely working on it, then charged 10k.
I had to chip in and loan my son the money, or he wouldn't even have gotten his boat back from this dubious mechanic / marina who was holding his boat hostage until the crook squeezed an inflated price out of my son.
My son got his boat back (because I bailed him out), only for the boat to break down on the first charter, the next day.
That terrible time for him (very upsetting for him, feeling so deceived, and I too) was followed by the boat being docked, not sea-worthy, and then looked at by several, other mechanics while my son learned a lot, quickly about Volvo motors, and going there all the time to work on the boat, to get it all good again, and he did. He about could be a mechanic himself now...
He received good reviews from charter customers and got some repeat-customers even.
He decided to get a 2nd boat in 2022 (with a loan - not from me) so he would never lose customers again because of having only one boat and it broken down.
Now he always has a backup boat and won't have to disappoint customers.
These three big setbacks are - I think - typically start-up issues.
Now, in the meanwhile, he has a good set of customers and very reasonable income.
But I fear that because of the 3 set-backs above (1 Covid, 2 boat out, 3 second boat purchase in TY22),
the Profit and Loss statement TY 2020, 2021, 2022 might not be good.
For TY22 it might be better, but that's also the year of the second boat (asset) purchase.
For TY23 I know he's operational, and his business seems to be around to stay,
with mucho happy customers.
In short: I think - including the Covid year - he might have 3 loss years ...
Clearly now, he has learned so much, overcame so much, has gained respect and customers and good reviews ... I know he is doing pretty well now.
But what about those years TY20, TY21, TY22 ?
Is there anything in the CARES act or some act or regs about how the Covid year,
should alleviate the Hobby Loss 3-year rule?
That year mucks up the whole situation, that otherwise, would not be an issue.
a hobby loss is not self-assessed and is not automatic. It can be refuted if audited. Whether, if audited, the iRS would agree with you is a matter between your son and the IRS. if the IRS does conclude it's a hobby loss, he can appeal the decision.
see this thread from the iRS concerning factors used to differentiate between a hobby and business
https://www.irs.gov/newsroom/know-the-difference-between-a-hobby-and-a-business
looking at the IRS thread, I would conclude it's not a hobby. Remember, I'm not the iRS
Thank you. No, it isn't a hobby.
I was worried about those 3 years though.
It would have been better if he had generated 0 income in 2019 and used it sheerly as a start-up year for expenses.
And then have the business beginning in TY2020.
But that was already filed. I can't undo it.
Not sure if it makes a difference - I think it won't - that in TY2019, he was sheerly a sole proprietor,
with no LLC.
He got the LLC with EIN nr in TY2020 and then added LLC to his business name.
It sure would be better if I could carve out that TY2020 for him though, just for that 3-year rule.
Oh well, in case of audit, I will try and help him hold his ground.
Yes, it is a serious business for him, but the TY2020 and TY2021 (dealing the mechanic/marina crooks) were setbacks in that he simply couldn't operate. He was very upset about it. Spent money on advertising, trying to get it all going again to make up for lost time and having to turn customers away because of the broken boat.
I guess, yes, he could prove that this is not a hobby (though obviously he loves fishing, and that why he got so good at it and can be a great captain, putting people 'on fish'). It is his only source of income.
Thank you. I worry a little less now. Because these thoughts (what if ...) keep me up at night.
@mahimahimom wrote:the Hobby Loss 3-year rule?
I think you are misunderstanding that rule.
The rule is that if it is profitable for three out of five years, the IRS will presume it is a for-profit activity. Having a loss for three out of five years does NOT mean the IRS presumes it is a hobby; it just means the IRS does not "presume" anything. They would look at the specific facts-and-circumstances, as outlined in the link from the other answer.