The IRS has an audit guide, Market Segment Specialization Program IRC Section 183, that is specifically aimed at Cattle and Horse Operations but I believe that a similar test would occur in a fish breeding operation.
This guide instructs auditors that
"if an activity’s gross income exceeds attributable deductions [in other words has as profit]
for 3 or more of the taxable years in a period of 5 consecutive taxable years, then the activity is presumed to be engaged in for profit, regardless of whether the activity is engaged in for profit. Unforeseen or fortuitous circumstances can impact profitability and should be considered."So if profit is made during any 3 years of a 5 consecutive year period (in other words the 5 years are consective not the 3 years) then your activity will be deemed to be engaged in for profit and the hobby loss rules will not apply. The unforseen circumstances rules can also circumvent the hobbly loss rules if for example you had a fish kill, etc.
Note:
The guide I mentioned above is specifically geared toward Horse and Cattle Operations. That being said for anyone that is involved in these types of operations or operations in which a similar farm activity is involved, the publication is an interesting resource. This guide is aimed more at taxpayers that that have an additional primary source of income (for example are employed full time) and the farm is a secondary source of income. This guide is available for download
here to anyone that is interested.
And of course the disclaimer...
The information provided above is for informational and entertainment purposes only and should not be considered as, nor relied upon as tax advice. Check with your tax preparer or your next door neighbor to see if the information discussed above applies to your specific situation. JHAP is NOT an expert in tax law as it relates to farm schedules so don't ask him any questions about either (1) tax law as it relates to a farm, or (2) farm law as it relates to taxes. JHAP grew up in the city and therefore doesn't know a lot about farms, he did regularly watch Green Acres as a child so he could probably differentiate between a goat and a sheep but don't rely on it. Tax code is available freely over the internet however prolonged exposure to tax code can cause nausea, projectile vomiting and overall discomfort, displeasure, disassociation, disbelief, discontent, disharmony, disheveling, disgust, disloyalty, disobediance, disquietude and many other words that start with dis. Four out of five doctors recommend avoiding any prolonged exposure to Internal Revenue Code while three of seven dentists actually enjoy reading tax code. This makes sense when you think about it because most folks don't like visits with either their tax preparer or their dentist. JHAP is a CPA that is licensed to practice in the State of California even though he resides in a perpetual State of Denial. JHAP will continue to practice until he gets better at it. The opinions expressed by JHAP are not necessarily those of Pond Boss's management, moderators, advertisers, members at large, members at small, or even medium sized members.
