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Shocking news; reporting Schedule C losses and lots of other income is an audit red flag.  Make it seem like the activity sounds like a hobby to cinch the deal.

In a recent case, a pilot with substantial wage and pension income bought an antique fighter jet.  He then poured an inordinate amount of money and time over the next eight years to restore it.

Later, he flew it in air shows and treated the activity as a Schedule C business

Among the factors that helped the Tax Court decide he didn’t intend to turn a profit:

  • he didn’t run the activity in a businesslike manner
  • he didn’t follow expert advice
  • he reported big losses that grew larger each year

So he lost his case and was responsible for the taxes on the income with the deduction disallowed.

Kurdziel, TC Memo. 2019-20

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