This is an important question to ask yourself when you incur losses.  If the IRS determines that your business is indeed a hobby, they can come back and prevent you from deducting your losses on that business.  The most common example of this that I hear is the guy who loves to fish – let’s call him Joe Taxpayer.   Joe figures that he can become a professional fisherman – taking people out on guided fishing trips on Lake Wylie (usually a lot of his friends) and also competing in fishing tournaments throughout the North Carolina and South Carolina.   Now Joe can deduct the cost of his fishing gear, boat, gas, and all of the other ordinary and necessary items that he uses in his fishing “business.”  Or can he?  Is it really a business or is it a hobby?

In order to get to the root answer, the IRS is going to try to determine whether or not Joe had a specific intent to make a profit with respect to his fishing business.    In order for Joe to deduct his losses on the business he must be able to show that it is being run with the intent of realizing a profit.  Keep in mind that Joe doesn’t actually have to make a profit – as long as he intends to make a profit.

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On Wednesday, I blogged about how North Carolina’s Amazon Tax actually resulted in lost revenues to the State.  The WSJ.com has an interesting article today, Maryland’s Mobile Millionaires, about how nearly a third of all of Maryland’s millionaires have vanished the state after it passed a tax increase on them in 2008.   This just goes to show that politicians usually do not think through the consequences of their greedy actions.

Most of you are probably thinking what I am – millionaires declined nationwide in 2008 due to the national recession.  The data goes on to show that one out of every eight millionaires that filed a Maryland tax return in 2007, did not file a Maryland tax return in 2008 – signaling that many had fled to other more tax friendly states.

I am not sure when (if ever) the elites throughout this Country will realize that they just can’t keep increasing taxes.  The answer to all of our budget problems always seems to be a tax increase. What about fiscal restraint and a massive slashing of the federal budget?

The rates are so high that mid-income to high-income individuals are refusing to start new businesses because they get so little reward for doing so.   Why would they want to take a big risk with so little opportunity for reward?  Even if they are successful, they send a bigger chunk of their profits to the government than they get to keep for themselves.

The IRS recently announced that there are approximately $1.3 billion in unclaimed tax refunds for the 2006 tax year for an estimated 1.4 million taxpayers.

Many taxpayers have not filed because they didn’t have enough income to require them to file a tax return – even though they had taxes withheld from their wages.  The law only allows these taxpayers a three year window to claim their refund – after that, the money becomes property of the U.S.Treasury.    For 2006 returns, the deadline to claim their refund if April 15, 2010.

The IRS provided a breakdown of these refunds by State.  In South Carolina, there were 16,400 individuals that have yet to apply for $13.8 million in refunds.  In North Carolina, there were 39,100 individuals that have yet to file for their $32.9 million in refunds.  (more…)

North Carolina was the first state to announce that it will delay state income tax refunds and issue them based on its available cash flow.  We have originally heard that refunds may be delayed into July but the NC Department of Revenue website shows that they are currently processing refunds and managing cash flow.  The state has provided a link to check the status of your NC tax refund through their website.

Due to the strain on the states budgets throughout the country, we suggest that you adjust your tax withholdings to eliminate the possibility of having substantial over payments in either federal or state payments.  We have already seen several states over the past year that have issued IOU’s instead of actual refunds.    The problem with an IOU is that you can’t use that to pay your mortgage or put food on the table.