Intent Is Not The Same As Being Engaged
What Constitutes a Trade or Business?
A group of friends decided to start a business of flipping homes. Generally, the business model is to find a property in need of TLC in a neighborhood of more expensive homes, immediately begin to make repairs and improvements to the home so that its amenities are attractive to buyers, and then sell (flip) the property at a gain.
To that end, Mr. Samadi became a licensed real estate agent and the group decided that he would manage any investment properties that were purchased. He identified properties that he believed his group would be interested in purchasing and drove the members of the group in his vehicle to inspect these properties.
On his personal tax return, Samadi deducted the mileage related to this activity on Schedule C. When the IRS audited Samadi, it disallowed all expenses associated with this flipping activity and found no basis for his argument that he was a real estate professional showing properties to his clients.
The Tax Court agreed with the IRS that while the taxpayer may have intended to engage in a business, the facts showed that the business had not commenced. Initial research is not considered the conduct of a business. To be engaged in a trade or business, the taxpayer must demonstrate continuous and regular activity for the primary purpose of generating profits. In this case, the taxpayer did not generate any commissions, no properties were purchased, and he did not represent any clients outside of his group.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.
