Recent Tax Court Case: Business Losses Denied—What Business Owners Can Learn

Cynthia Montoya, EA • October 1, 2025

Background
Wesley and Janet Young, an Oklahoma couple, owned and operated Pecandarosa Ranch, which combined pecan farming, raising livestock, horse activities, and events. Despite their busy efforts and substantial investment—including building an arena and maintaining a large property—they reported significant financial losses from the ranch for many years.


What Happened
The Youngs claimed the ranch was a real business, deducting all its losses from their other income on their tax returns. However, the IRS challenged their tax filings, arguing that the ranch wasn’t genuinely run to make a profit. The Tax Court agreed with the IRS and not only denied the loss deductions but also imposed penalties.


Key Lessons for Small Business Owners:

  • Show a Real Profit Motive:
    The court looks at whether your activity is genuinely intended to make money. Things like detailed business plans, budgets, and regular reviews of your finances are strong evidence of a real business motive.


  • Keep Businesslike Records:
    The Youngs used personal accounts and didn’t keep thorough up-to-date records for the ranch. For your business, use a separate bank account, maintain organized books (using tools like QuickBooks), and track your income and expenses carefully.


  • Separate Fun from Business:
    If your business involves hobbies or things you enjoy (like sport or farming), be extra diligent. Personal enjoyment is fine, but make sure your operations, spending, and decisions focus on making money—not just having fun.


  • Sustained Losses Are a Red Flag:
    Reporting losses year after year—especially if you also have outside income—can make the IRS skeptical. Occasional tough years are understandable, but without a clear path to profitability, you may not be able to deduct ongoing losses.


  • Professional Advice is Key, but Not a Cure-All:
    Relying solely on tax preparers for filing returns doesn’t protect you if your business isn’t run for profit. Get professional advice on how to structure and operate your business before there’s a problem.


Bottom Line
Simply putting time and money into a business isn’t enough. To protect your deductions, run the operation in a genuinely businesslike way with a clear profit goal, strong records, and regular review of results.


Do you need help to make sure you are compliant with IRS regulations and maximizing allowable tax savings? Please contact us to see how KAC Consulting, Inc. can assist!


Summary based on Young v. Commissioner, U.S. Tax Court (2025)

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