In a recent case, a business owner had purchased a cattle farm decades ago and deducted operating losses for many years. He had only one small profit in 24 years. According to the IRS, the ongoing losses from his farming efforts mainly served to shelter the income he still received from his company so the losses were disallowed.
When the case was decided, the court awarded the taxpayer a refund, upholding his deductions (Benny Mullins, DC ED Tenn., No. 3:01-CV-171). The court noted that the taxpayer read cattle farming publications and attended various seminars on raising cattle. There were profitable sales of farm parcels over the years because the land had appreciated.
Thus, to deduct losses from a sideline or retirement activity, it’s not necessary to show profits. Instead, you must be able to show that you made a genuine effort to reach profitability. An increase in the value of the underlying real estate also can demonstrate a profit motive, to justify deductions of operating losses.
