The Tax Court has decided in favor of a taxpayer who insisted her hair-braiding business was not a hobby.

Amy Ndiaye Delia, acting pro se (for herself), established to the satisfaction of the Tax Court that the hair-braiding business she engaged in was not a hobby but was operated for profit, and therefore she was able to deduct losses in excess of income from her Laurel, Md.-based business, Nanou’s Hair Braiding. Certain of her claimed expenses were not adequately documented, however, and she was liable for the accuracy-related penalty as to those.

There is no bright line rule as to when an activity is a business entered into for profit, which would allow the deduction of business losses in excess of profit, or a hobby, which would not. There are, however, nine nonexclusive factors listed in Reg. sec. 1.183-2(a) that are relevant in whether a taxpayer conducts an activity with the intent to earn a profit. These are: (1) the manner in which the taxpayer conducts the activity; (2) the expertise of the taxpayer or his advisers; (3) the time and effort spent by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer’s history of income or loss with respect to the activity; (7) the amount of occasional profits, if any; (8) the financial status of the taxpayer; and (9) elements of personal pleasure or recreation.

The court noted that no factor or group of factors is controlling, nor is it necessary that a majority of factors point to one outcome. Examining all nine factors, the court observed that the only factor that weighed heavily against Delia was the salon’s persistent history of losses. However, it concluded that despite that fact, she conducted her hair-braiding business with an actual and honest (if unduly optimistic) objective of making a profit.

“It might have been prudent for her to have exited this business before she did, but the long-term rental contract posed a serious obstacle,” the court observed. “She concluded, not unreasonably, that trying to salvage as much profit as she could was preferable to risking damage to her credit rating by defaulting on her lease commitment. She closed the business promptly after extricating herself from the lease.”

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