Realtor

Yes, unless there's some kind of funny business you haven't told us about.

Was he actively conducting business trying to generate revenues?

If the realtor has activity been working and attempting to generate revenues the answer would be Yes, But I would make sure the efforts were well documented. With the current real estate market the revenues would be substantially down. Document, Document, Document, Document

In my opinion, submitting expenses without income will not be consistent with the matching principles even though this is not a Generally Accepted Accounting Principles ( GAAP) issues. In this case, as you know, IRS's authoritative publication can be a deviation of GAAP principles. I will want to see a quote from an IRS code that says this is allowed. If the code says so, then I will consider myself being informed . Otherwise, I will say that  this realtor, like any body else, has nothing to match the expenses with and thus would have  created a negative personal income return. Now, if that is a corporation or any form, then my answer will change as such entities they are allowed to have net operating loss that can remain until a gain is reported and the net carryback and carry forward can be applied. The only credits I know that is allowed for personal income tax even without paying taxes ( thus no income for the current year) will be Earned Income Credit ( EIC)  So, show the IRS publication and I will be glad to change my answer on that one   

I believe the burden is on YOU (or the IRS) to show why the expenses would not be deductible.  They ARE deductible, IMO, because they are ordinary and necessary in the conduct of t/p's business.  As a cash basis taxpayer, his cash flow is subject to the vagaries of an arbitrarily-enforced 12/31 year-end.  Now, if the guy didn't show any income for the last half of the preceding year or the first half of the subsequent, I might agree with you.  But that assumes facts not in evidence.

Here's a link to a discussion of the issue, but the result is inconclusive.

http://www.taxalmanac.org/inde...

 Tijean, the cash basis is an acceptable method of accounting for tax.  In addition, the "all events" test for an accrual-basis taxpayer could easily be met even in the absence of any (cash or accrual-basis) income.  See Code Sec 446(c), and Regs thereunder.

I might worry that this is actually startup expense, although IMHO startup expense for a service business is generally minimal.  But the matching principal?  Seriously?  I don't keep up with GAAP, but the last I looked, it was possible to have expenses in the absence of income even there.

Also, individuals can have NOLs just the same as corporations can.  S-corps (for the most part - I don't think that dragging BIG tax into this will improve things) and partnerships may not.  Schedules C are allowed to show losses (although those losses may increase audit risk).

You're not going to make many friends here demanding Code cites that refute your claim that a corporation can take a loss but a sole proprietorship can't.  Perhaps you should have spent less time on the M-1 and M-2?

Well said, Phoebe.  Tijean, please try to do some research of your own.  You will learn more and retain it better than if everything is handed to you.

I think Tijean might have attempted to do some of her (his?) own research.  Problems tend to arise, though, when you seek tax answers in GAAP guides.

Tijean, you realize, don't you, that showing $1 of income on Schedule C would undermine your entire argument?

If so, I back off my response.  However, as Phoebe stated, demanding code sections etc. is not going to earn points here.  If s/he wants to take contrary positions to what is being offered, then s/he needs to supply their own code sections to counter what is being provided.  S/he needs to understand that this is a forum staffed by volunteers, not IRS personnel who can spout code at the drop of a bucket.  (Excluding Phoebe, that is.)

Excellent comment Tilt.

Bwahahaha.  I've just figured out how to write a query in Kleinrock - I don't generally mess with Code sections until I've exhausted the non-authoritative plain-English stuff.  One of the reasons I suggest people not ask for Code cites is that something that appears possibly allowable in the Code may be disallowed completely by Reg - and for most common things, there's a Pub that explains the right answer reasonably clearly.  Pubs aren't authority, so don't technically count, but if you're so sure that a Pub is wrong, you darn well better not be relying on someone else to do the research to support that conclusion.

I still haven't gotten my "Kleinrock switches to the new system" CD, since we're only on quarterly updates.  Oooh, I dread having to learn a new search algorithm.

 Also, verbal advice from the IRS is worth considerably less than the paper it's written on.

I once had the pleasure of taking some CPE taught by Lucy Clark, the IRS person responsible for writing the passive activity MSSP.  I'd have followed her verbal advice as if it were gospel.  Random person staffing the phone line?  May as well ask the Magic 8 Ball.

I still think it's a damned shame that the IRS can put out something (namely Pub. 17) that gives instructions but cannot be relied upon as accurate advice. This is exactly why the poor public is in such an uproar.  Gee, the poor shmuck who is reasonably well informed can't count on the instructions to be correct?  What the heck is the sucker supposed to do?