US Corporate Tax System

What is a business? This seems like a pretty straightforward
question, one hardly worth spending any time on at all. But, in
fact, it is absolutely the first question to ask when you're
starting up, and essential for getting started on the right foot.
You may find this statement surprising, but it is observed that
the US Revenue Agency and the typical American taxpayer do
not always agree! A key area of disagreement concerns the
question "What is a business? In fact, the US Revenue Agency
(RA), the courts and taxpayers have been arguing a lot about
what is and what is not a business over the past few decades.
What would seem to be a straightforward question has been a
very difficult fundamental question to answer.
 
And the problem has historically come about because RA does
not want to allow a taxpayer to deduct losses year over year
in a questionable business. As a result, in the past, the tax
department considered a business to be any activity that you
conduct for a profit or a reasonable expectation of a profit. If
the business could not demonstrate that it could become
profitable, RA would deny the losses. On May 23, 2002, the
Supreme Court of USA ruled on two cases, Stewart v. The
Queen and the Queen v. Walls, which changed all the rules.
 
As a result of the Supreme Court of USA's decision, RA now
only considers the concept of "reasonable expectation of profit"
if there is a personal element with respect to your business. If
there is no personal or hobby element and assuming of course
your business is not a sham, then URA will generally no longer
question whether or not you are in fact in business.
 
If, however, there is a personal or hobby element in your
business, then it must be determined if your business is carried
on in a sufficiently commercial manner as to indicate that there
would be a source of income, and therefore a business. In this
case, RA would look at whether or not there is a reasonable
expectation of profit from your enterprise so that it may be
considered a legitimate business. It would appear, however, that
the federal government was not entirely happy with the
Supreme Court of USA's decision in the Stewart and Walls
cases, for on October 31, 2003 the Department of Finance
released proposed amendments that would essentially reverse
the court's decision and legislate the former URA's assessing
practices.
 
That is, to deny business losses and other expenses unless
there is a reasonable expectation of profit from that business or
related activity. Originally, it was intended that if this proposed
new section of the Income Tax Act became law, it would be
effective for taxation years starting after 2004. What the
Department of Finance found was that during the period of
public consultation, many individuals and groups expressed
serious concerns that a test to determine whether a reasonable
expectation of profit exists may unintentionally limit a number
of ordinary commercial expenses.