Establishing Regular and Active Involvement in a Business

Business expenses are certainly a routine part of doing your taxes. However, you should keep detailed records of your deductions, and make sure that they are legitimate. One would-be author found this out the hard way, when he attempted to claim $19,000 in travel expenses for his book – which was never written.

Claiming tax deductions

In 2006, a man took time off of his regular job to embark upon a world trip with the intention of writing a book about it. He had no book contract and was not a published author. On his return, he attempted to take a business loss for the expenses he incurred on the road, but the IRS slapped him with a $5,000 fine in back taxes and an additional $1,000 penalty.

What he did right

The man had a detailed business plan in place outlining the purpose of his trip and how it applied to his book. He also kept an expense log, documenting each expense and noting the corresponding date and location. His claim was that the overall trip itself was a research trip, which should then be tax-deductible.

What he did wrong

This case appeared in front of the 9th Circuit Court of Appeals in 2011, nearly 5 years after his trip concluded. At this point, there was no published book. In fact, there was no book at all. The tax court was interested in proof that he was regularly and actively involved in the business. The fact that the business of writing the book never took place counted against the wannabe author. So, too, did the fact that his expense log did not include information on the business purpose of each expense. This lead the court to decide that he was not repeatedly in business of an author.

He was required to pay $5,000 in income taxes from the period, but the penalty fine was dropped because he acted in good faith by consulting a tax professional.

Establishing regular and active involvement in a business or trade

This story sounds like a nightmare scenario to many of us, but it is also easy to see why it happened. In order to claim active involvement in a business, an individual must be able to meet certain criteria. In general, the taxpayer must show that they work on a regular, continuous, and substantial basis in the business or trade.