The Fair Tax Act, Part XLIV
OK, one of the best chapters in the bill for education reasons: Chapter 7: Special Rules!
`SEC. 701. HOBBY ACTIVITIES.
`(a) Hobby Activities- Neither the exemption afforded by section 102 for intermediate sales nor the credits available pursuant to section 202 or 203 shall be available for any taxable property or service purchased for use in an activity if that activity is not engaged in for-profit.
`(b) Status Deemed- If the activity has received gross payments for the sale of taxable property or services that exceed the sum of–
`(1) taxable property and services purchased;
`(2) wages and salary paid; and
`(3) taxes (of any type) paid,
in 2 or more of the most recent 3 calendar years during which it operated when the business activity shall be conclusively deemed to be engaged in for profit.
So hobby activities are those activities a business engages in that generally don’t turn a profit. If you aren’t profiting, then you are simply consuming and therefore should not get tax credits on the activity. So this is a tax-evasion blocker. One tax evasion scheme that frequently comes up is to sell something cheap (way below retail to reduce tax) to a related party, and then resell it, ‘used’ at close to retail price, thus saving the difference in tax. Comments, let me know!
O.K., Ford has lost over $1 billion per year for the last five years. According to this section, does that mean that Ford is simply “hobby shopping”? Will they lose their BTB exemptions and credits? Or does the addition of the word “conclusively” make a difference? (Yes, it’s a slow morning!)
I think this is on a per-activity basis, and would have to be persistent. In other words, a business would probably not be able to sustain a business activity at a loss for 2-3 or more years. If they unwisely tried to do so, they would lose their exemptions for those activities (their credits get flagged and they can’t apply for them anymore for said activity). However I don’t think this is true for the business’s bottom-line. One could not expect every business to have to comply with this on a ‘bottom line’ kind of level.
Also a business activity is pretty simple and has intent behind it. For example, Ford sells Ford cars; that’s one business activity Ford also sells Mazda cars. Ford sells its Ford cars at a price that is profitable for them using the definition above, all is well. If Ford was intentionally selling Mazdas at a loss (for years at a time), then they’d be taxed on business input for the Mazdas.
Edit: Ford really needs to get their crud together. Chrysler too.
Edit Again: I was just looking into the Ford/Chrysler stuff and apparently both companies often get a particular car model into a sell-at-a-loss position by not getting the correct efficiencies at the factory. Just goes to show how prices do not always depend on how much something cost to produce.
Help my thinking about this. I raised the question, not because of Ford, but because I personally ran afoul of the IRS back in the mid 1980″s over a boat lease business I owned in Annapolis, MD. Bought a $70,000 sailboat (on credit), leased it out for the going rate, took a loss each year(short season in Md.) and declared the loss on my income tax. Actually worked pretty hard maintaining the boat, and adhered to the personal use limitations, but the IRS called it a hobby anyway, and socked me with back tax, penalties and interest. Business venture expired!
Now, under the Fairtax, buy the boat (BTB-no tax), lease it out, can’t ever “receive gross (lease) payments that exceed the sum of the taxable services purchased (the boat?), so is my business a hobby?
What am I missing? Is there a section on leases that might clarify this mess?
Hmm. I don’t know. Are you essentially leasing out the boat to help you pay for the boat?
Because it doesn’t sound like a sound business venture if it will never make money.
Yes, I’m leasing out the boat to help pay the mortgage. Why isn’t it a sound business venture if what I’m doing is building equity although not showing an annual profit?
And if I ever sell the boat and bag the business, would a sales tax have to be paid? By whom, me or the buyer?
It is sound insofar as it helps to subsidize paying for the boat, but boats generally depreciate. You won’t ever actually profit on your investment, only manage to pay less for it than you would otherwise.
It sounds as if the straight income tax also snags you on this type of deal too, according to your story. I am unfamiliar with why.
Under the Fair Tax, you would simply not be able to claim the BTB tax credit for leasing the boat out (example, fuel, cleaning, etc.). You would also have to pay for the original sales tax on the boat at the time of purchase, unless you were a registered business. If you were a registered business, you would probably have to treat this use of the boat as personal conversion, and pay tax yourself on the market value of the boat.
If you eventually bagged the business and sold the boat, it should have been taxed at that point so you could sell it used.
At least that’s how I interpret this. IANAL, etc. Anyone else want to chime in?