Is Hard Lending a small business with deductions?

[Suzi Curtis]

Hi,

Helping my father here.....He was a Hard Money Lender (private lender) and is now being audited by the IRS.  The IRS is saying his business is not a small business, that he must have a license and he cannot take deductions related to his lending.  He was loaning money to developers, not private residences.  

Is this true?  

Thanks for any help you can provide!  He feels beaten down by the IRS but doesn't feel like he has broken any rules.

SHC