In various news reports, Jim Morris, President of the Pacers Sports & Entertainment Group, i.e. the Pacers have claimed to have lost money on the team 28 of 30 years. In 2009 news reports, the talk was of losing money 9 of the last 10 years, which I assume by now is 10 of the last 11 years. Quite a losing streak.
When a business continues to lose money year after year, it can end up being classified as a "hobby" by the Internal Revenue Service which would limit business deductions. The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years. The IRS explains the rule:
In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.
In order to make this determination, taxpayers should consider
the following factors:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Does the taxpayer depend on income from the activity?
- If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
- Has the taxpayer changed methods of operation to improve profitability?
- Does the taxpayer or his/her advisers have the knowledge needed to carry on the activity as a successful business?
- Has the taxpayer made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
With the exception of a couple of these questions, the answers seem to be a resounding "No." Given the fact that the Pacers supposedly have lost money 28 of 30 years (and the presumption is that a business makes a profit 3 of 5) is there any doubt that the IRS, if presented with those financial claims, would reclassify the Pacers as a "hobby?"
Since Morris won't be forthcoming about the Pacers' finances, maybe he can tell us whether the IRS has classified the Pacers as a "hobby" which would support his argument that the Pacers are the money pit he claims the team is.