Having a Business Entity Doesn’t Make Everything in Your Life Deductible

A Tax Court case ended poorly for a retired minister who tried claiming large business losses for a supposed business venture.  The minister, a Reverend Ronald Faust, created something called “MacLeisure Creations” after his retirement.  According to the Court report, “‘MacLeisure’ is a combination of Ronald Faust’s previous name, ‘Mac Keyes’, and the phrase ‘leisure ministry’.”

The IRS audited Faust’s 2005 and 2006 tax returns, which showed $235 of income from MacLeisure and $20,771 of expenses in 2005, and $210 in income and $36,509 in expenses in 2006.  For the two years in question, that means that MacLeisure’s expenses were more than 128-times greater than its income.  This seems to have been the pattern for MacLeisure.  According to the Court report, “The Fausts reported that MacLeaisure Creations had large net losses eight years in a row.  Evaluated as a business, the supposed activities of MacLeisure Creations have been a financial disaster.”

Here’s more from the Court report:

In Faust’s view, MacLeisure Creations encompassed virtually all his activities. Consistent with this view, Faust claimed business deductions on his 2005 and 2006 joint tax returns for the costs of, among other things:

• writing books that he distributed to his friends and family for free;

• buying groceries;

• buying books and magazines;

• going on ski trips with friends;

• buying boating equipment;

• repairing his washing machine;

• repairing and maintaining his house;

• dining with his wife;

• buying clothes for his son;

• attending comedy shows;

• paying utility and telephone bills;

• attending art exhibits with his daughter, who is an artist.

Rather than attack the obvious fact that most of these expenses are personal and not business expenses, the Court instead went after Mr. Faust’s profit motive and ruled that MacLeisure is not operated for profit.  This results in the deductions being recharacterized as itemized deductions and limited to the amount of income from the endeavor each year (so $210 and $235).  The Court also slapped Mr. Faust with an accuracy related penalty.

The moral is:  saying that you have a “business” does not magically turn personal expenses into fully deductible business expenses.  And if you show tiny amounts of “business” income offset by tens of thousands of dollars of “business” expenses, you will probably get audited.