The AICPA Tax Executive Committee has sent a letter to the IRS suggesting changes be made to the instructions for Form 461, Limitation on Business Losses. The form is used to compute the limitation on business losses that was added by IRC §461.
Generally, under IRC §461 a taxpayer is limited to net business losses in excess of business income of $250,000 in a single year ($500,000 for a married couple filing a joint return). The AICPA comment addresses a concern that the definition of a trade or business in the instructions may be too limiting. The current definition in the regulations reads as follows:
An activity qualifies as a trade or business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity.
That definition can be read to require an individual to be directly involved with an activity for it to be a trade or business. However, such an individual level of involvement is not generally required for an activity to be a trade or business under the IRC, so long as someone (or ones) is involved in the activity with continuity and regularity.
Thus, the AICPA suggests the instructions be changed to read as follows:
An activity qualifies as a trade or business if your primary purpose for engaging in the activity is for income or profit and the activity is conducted with continuity and regularity.
The letter explains:
The language in the instructions should specify that the “activity” is conducted with regularity and continuity. The taxpayer’s “involvement” in the regularity and continuity is not one of the tests for a trade or business. The taxpayer may have a passive role as an investor in a partnership, but he/she is still “in” a trade or business if the business itself is conducted with regularity and continuity. Likewise, a sole proprietor may not have involvement in her sole proprietorship in the quantitative sense of hours, but nonetheless the business is conducted with regularity and continuity (through agents hired by the sole proprietor).