US Corporate Tax System - E-book - ePub

What is a business? This seems like a pretty straightforwardquestion, one hardly worth spending any time on at all. But, infact, it is absolutely the first question to ask when you'restarting up, and essential for getting started on the right foot. You may find this statement surprising, but it is observed thatthe US Revenue Agency and the typical American taxpayer donot always agree! A key area of disagreement concerns thequestion "What is a business? In fact, the US Revenue Agency(RA), the courts and taxpayers have been arguing a lot aboutwhat is and what is not a business over the past few decades.
What would seem to be a straightforward question has been avery difficult fundamental question to answer. And the problem has historically come about because RA doesnot want to allow a taxpayer to deduct losses year over yearin a questionable business. As a result, in the past, the taxdepartment considered a business to be any activity that youconduct for a profit or a reasonable expectation of a profit.
Ifthe business could not demonstrate that it could becomeprofitable, RA would deny the losses. On May 23, 2002, theSupreme Court of USA ruled on two cases, Stewart v. TheQueen and the Queen v. Walls, which changed all the rules. As a result of the Supreme Court of USA's decision, RA nowonly considers the concept of "reasonable expectation of profit"if there is a personal element with respect to your business.
Ifthere is no personal or hobby element and assuming of courseyour business is not a sham, then URA will generally no longerquestion whether or not you are in fact in business. If, however, there is a personal or hobby element in yourbusiness, then it must be determined if your business is carriedon in a sufficiently commercial manner as to indicate that therewould be a source of income, and therefore a business.
In thiscase, RA would look at whether or not there is a reasonableexpectation of profit from your enterprise so that it may beconsidered a legitimate business. It would appear, however, thatthe federal government was not entirely happy with theSupreme Court of USA's decision in the Stewart and Wallscases, for on October 31, 2003 the Department of Financereleased proposed amendments that would essentially reversethe court's decision and legislate the former URA's assessingpractices. That is, to deny business losses and other expenses unlessthere is a reasonable expectation of profit from that business orrelated activity.
Originally, it was intended that if this proposednew section of the Income Tax Act became law, it would beeffective for taxation years starting after 2004. What theDepartment of Finance found was that during the period ofpublic consultation, many individuals and groups expressedserious concerns that a test to determine whether a reasonableexpectation of profit exists may unintentionally limit a numberof ordinary commercial expenses.