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What to Know About the IRS's Safe Harbor Clause

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In the latest installment of his series addressing the tax concerns of freelancers, Julian Block discusses Section 183 of the tax code, which contains a carefully worded safe-harbor clause for small business owners. It's one of a few ways the IRS differentiates between business income and hobbies.

Aug 19th 2021
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Just joining in? Go back to parts one and two, where I answered unusual questions submitted by Waldo Lydecker, a freelancer who said he’ll pocket a seven-figure advance noticeably north of one million dollars for his next book and who was adamant that he’s entitled to my advice on how to trim his tax tab.

Part three discussed Internal Revenue Code Section 183, which allows “business” losses and prohibits “hobby” losses. Our lawmakers made sure to include a precisely worded safe harbor within Section 183. 

Safe harbor. Section 183 presumes that freelance writer Ceil engages in a business, as opposed to a hobby, provided she has a net profit, meaning, in IRS lingo, an excess of receipts over expenses in any three out of the last five consecutive years. Note, though, that it allows the agency to rebut that presumption.  

(By the way, Congress, in its wisdom, decided that writers, photographers, artists and the like aren’t as deserving as individuals involved in the breeding, showing or racing of horses. A precisely worded exception confers an easier standard on them. They only have to show net profits in two out of seven years.) 

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Consequently, Ceil usually doesn’t have to fret if she has at least three profitable years during the last four. Satisfying that stipulation entitles her to fully deduct her expenses this year. It’s okay even if this year’s 1040 form reports a loss. 

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By thebreezybookkeeper
Aug 23rd 2021 06:25

Greetings,

Thank you for sharing your blog.

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