Night Owl 9/Night Owl CD-ROM (NOPV9) (Night Owl Publisher) (1993).ISO/006a/bbslaw10.zip/TAXOTHER.TUT

Text File | 1993-03-21 | 10KB | 212 lines

#help.tut PRESS ENTER FOR HELP
#define.stb Definitions of legal terms
#183.sta Internal Revenue Regulations, tax losses
TAX DEDUCTIBILITY OF BBS OPERATIONS

There are 3 subjects regarding taxes and BBS systems. These
cover:

a) deduction of BBS expenses when the BBS is not the sole
activity (deduction of BBS expenses by a business which does not
have running a BBS as its primary activity);

b) deduction of tax losses, BBS as sole activity, including
determination if a BBS is run for profit or is a hobby;
and

c) general rules for BBS accounting, including depreciation and
other tax preparation and planning.

This tutorial covers a and b. Topic c will be issued in an
update.

In the world of tax law there are fewer constants than in other
areas of law. Accordingly, our staff, in consultation with
C.P.A's and after review of I.R.S. regulations have prepared
these tutorials. However, the resolution of tax disputes are
usually made "in due consideration of all the facts and
circumstances" which is a polite way of saying that anything can
change the outcome, and these determinations are made on a case
by case basis.

Tutorial (a)- Deduction of BBS expenses when the BBS is not the
sole activity.

Most software houses have multi--line BBS systems for support, for
distribution of upgrades and even for taking orders on line. In
this case, deduction of the expenses related to operating the BBS
system are simply ordinary business expenses and can be
characterized either as part of support expense, part of sales of
expense or even part of the cost of goods sold.

What about someone who is engaged a trade or business that is not
directly related to computers? Let's take as a test case, a
florist. If the florist operates a BBS, the expenses incurred in
operating the BBS, provided that it is a bona fide attempt to
publicize the business or to take orders is properly deductible
as an expense of the business.

This rule would apply even if the BBS traffic is not all or even
mainly directly to the floral business. However, it is
recommended that the availability of order by BBS be included in
sales literature and other advertisements.

DEDUCTION OF LOSSES- BBS as sole activity

Whether running a BBS as full time job, or, as an after work
activity, costs of long distance to gather echo mail, doors etc.
can cause a loss from operations. Many BBS systems that are now
Super Systems with 50, 100 or more lines were unprofitable,
struggling for acceptance and user dollars.

Since many BBS systems lose at the start of their operation (as
do most businesses in their initial phases) the IRS has provided
two different yard sticks as general rules for individuals and
Small Business (Sub S) corporations. These are:

1) Presumption that activity is for profit, and thus, losses are
deductible. The activity will be presumptively for profit if in
the past 5 years, the GROSS INCOME of the activity exceeds the
deduction attributable to the activity in any three of the years.
A rarely used provision allows an election that the presumptive
period be extended. However, it is strongly recommended that
parties do not use this election, since it effectively "flags"
the taxpayer's concerns over the propriety of the deduction.

Many persons think that this is the exclusive test. In fact, it
is not. In many reported decisions activities which have had much
longer records of losses have been found to be businesses engaged
in for profit. Even if a taxpayer meets this presumption, the
Internal Revenue Service is still entitled to attempt to rebut
it. In fact, the "objective test" stated below is far more
descriptive of the actual determinations which are made by the
IRS in case of disputes of the deductions. The fact is that many
businesses fail, or, have long periods of losses before
establishing a market niche and a profit.

In most cases, the IRS uses the objective test.

2) "Objective test" based on nine factors:

1) The manner in which the taxpayer carries on the activity;
2) The expertise of the taxpayer or his advisors;
3) The time and effort expended by the taxpayer in carrying on
the activities;
4) 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 losses with respect to
the activity;
7) The amounts of occasional profits, if any, which are earned;
8) The financial status of the taxpayer; and,
9) Elements of personal pleasure or recreation.

The objective test is not based solely on the nine factors stated
above and the regulations (which are reproduced in full, and can
be read on screen by using the "S" option) specifically provide
that any other relevant factors may be considered by the IRS.
Some of the other facts that are considered are the statements of
intent made by the taxpayer and the tax sheltering affect of the
investment. In addition, the financing terms

The test considers the actions of the taxpayer as a whole. One or
more factors may be conclusive.

The regulations discuss the nine factors in detail.

Factor one is the behavior of the taxpayer. Keeping business like
records is important, as is objective signs that it is a business
rather than a hobby. For example, having a separate business
account, a business license and paying business rates for phones,
etc. are strong indications that a BBS system is being operated
in a business like manner. This may cause some difficulties since
in many cases, the BBS system is operated out of a person's
residence, and it may not be possible to obtain a business
license if the area is not zoned for office use.

If the business experiences a loss, changes in operations to try
to make a profit are important.

Factor two is the expertise of the taxpayer or advisors. In most
cases this factor will be immaterial to the consideration of BBS
related businesses, since the person establishing the BBS almost
always is a "power user" of DOS and educates himself about
telecommunications. This factor usually is invoked only when a
taxpayer goes into farming and has no experience in farming and
does not employ a trained manager.

Factor three is the time and effort expended by the taxpayer. For
example, if a taxpayer resigns his job and works full time on a
BBS a profit motive will be found, with the exception that
someone with a huge income from investments who works 40 hours a
week on a BBS in a haphazard fashion may not be found to have a
profit motive.

However, full time activity is not needed. The time must be
commensurate with the economic value of the enterprise. If
employees or partners are involved, less time by the taxpayer is
required.

Factor four, expectation of appreciation of the property should
be inapplicable since computer equipment is notorious for
quickly depreciating in value since the technology improves
rapidly.

Factor five is the "taxpayers success in other activities." This
factor gives recognition to the fact that certain business
persons have the ability to turn around losing propositions.
Accordingly, such taxpayers are given more latitude. However, the
mere fact that a taxpayer has never been involved in a similar
business is not proof that the taxpayer lacks a profit motive.

The sixth factor is the profitability of the venture.
Suprisingly, if a business makes a profit it is more likely that
it is intended to make a profit than one which does not! (The
Tautology department to the assistance.) There is some small
degree of actual meaning in this section. If a business is
continued for a period of much longer with losses than usual, the
IRS may come to the determination that the activity is not
engaged in for profit.

The regulations also refer to such esoteric ideas as the
relationship between receipts and disbursements is a separate
consideration from profitability. (No, this is not bad comedy
writing.)

However, the regulations do refer to the fact that if losses are
caused by unexpected circumstances such as theft, depressed or
saturated markets the losses do not necessarily disprove profit
motivation.

Factor seven considers the amount of profit in relationship to
losses and investments. Thus, a small profit if totally
outweighed by losses, or, profits that are indicative of a
terrible return on investment may indicate that the businesses is
not truly engaged in for profit.

However, if there are any years with large profits, ordinarily
this is conculsive proof that the activity is engaged in for
profit.

The penultimate factor is the financial resources of the
taxpayer. For example, if the taxpayer does not have substantial
assets, this is taken to indicate that a profit is necessary in
order to survive, and, thus the business activity of the taxpayer
is geared to earn a profit.

However, if a taxpayer is wealthy and engages in a continuing
stream of losses then in most instances would torpedo someone who
is not wealthy, then the losses are likely to be found a "hobby"
rather than a business loss.

The last factor is the element of personal pleasure or recreation
in the activity. Exotic activities which are not conducted in a
business like fashion will in most instances be determined to be
a hobby. The regulations spend a great deal of time discussing
horse racing, pointing out such obvious circumstances that those
who act as if they do not care whether they make money or not,
and only race at "prestigious" events and go to parties they are
not in it for a loss. The point here is that you do not have to
suffer but it needs to look like work!