Deductible business expenses, meet 2020

There is a longestablished principle that tax deductions are a matter of “legislative grace.” This means that nothing is deductible unless Congress says so.

But of course common sense informs us that business expenses are deductible. Even those uninitiated to the peculiarities of the tax law have heard “that’s a business deduction.”

Common sense aside, that’s true, subject to that legislative grace. Section 162 of the tax law says that ordinary and necessary expenses of carrying on a trade or business are deductible. This is not free grace, one must satisfy the terms.

Ordinary means commonplace. Necessary means appropriate and helpful. So say the courts. That all seems manageable.

But, wait, what does it means to be “carrying on” a trade or business? “Commonplace” and “appropriate and helpful” create no tax benefit unless tied to some business activity.

In the sitcoms of my youth there were men who viewers were told were businessmen when not at home with the TV family. Viewers inferred being in business requires (1) being a man (2) going to an office during the day and (3) wearing a drablooking suit and a tie.

When first studying the tax law I was shocked to learn these are not the requirements to be in business. Apparently, father does not know best and we should leave it to someone other than Beaver.

In the “preamble” to several regulations issued over the past 10 years the Treasury Department told us that “The rules under section 162 for determining the existence of a trade or business are well-established.”

Somebody forgot to tell the courts about these well-established rules. Courts instead tell us that carrying on a business requires a “sufficient quantum of focused activity.” Don’t like that? Try “regular, continuous, substantial” activity.

Wow, can’t we just say it’s when a man wears a suit? We could even add modernizing language “the term ‘man’ shall be interpreted to include women and for determinations involving women there shall be no requirement that a tie be worn.” Much clearer than a sufficient quantum of focused activity.

But noooo, says Congress. So we’re left to show that there is some activity, carried on with regularity, with continuity, with the intent to make a profit, and with some measure of substantiality.

While this definition can be a problem, I will concede that for most situations it is clear when a business is being carried on. Or at least it was.

So let’s pretend we’re in a pandemic. And there are governmentimposed restrictions either preventing a business from operating or limiting its activity to some specified percentage of capacity. Close your eyes and imagine.

What does that mean to the trade or business status? There can be many scenarios. If the business operates at a profit during the pandemic, there should be no issue regarding its business status.

If the profitable business has acquired new equipment during the pandemic, a temporary cessation of operations may delay the timing of allowed depreciation deductions. Since the law may otherwise allow a full expensing of the equipment this may be a concern only when the asset was never used by year end.

A new business that intended to begin operations, but was prevented from doing so, or was limited in scope, may find its business status challenged for 2020.

Conventional application of the tax laws might argue that the new business loss in 2020 can never be claimed in any year because it was not (yet) run like a business. While often called the “hobby loss” rules the law simply requires it be an activity not engaged in for profit.

Even a pre-pandemic business may still be challenged on its ongoing business status during the pandemic. The CARES legislation allowed for a five-year loss carryback to allow businesses to get refunds of previously paid taxes.

A 2020 loss must be from an active business to qualify for carryback. If expensing a 2020 asset acquisition created or increased a 2020 loss that expense might be challenged as not yet related to business use.

One would hope that the 2020 tax status of operations as a “business” will be made with a sense of equity for pandemicinduced shutdowns or slowdowns.