Week 4- I want losses every year on my business because I don’t want to pay taxes, is that OK?

Dec 7, 2020 Profit and Losses, Self-Employed, Taxes, Accountant, Hiring an accountant, New business, Tax Help, Benson, Dunn, Four Oaks, North Carolina

Every year I have clients come in and they want to have “businesses” on their tax returns that always show a loss. At some point in time, they have received “advice” from their barber, the country store gossip corner or a friend that told them to show business losses to get a larger refund.

Why anyone thinks this is good idea is beyond me….. most of the time when I see this it is from someone who cuts grass on the side or they grow a garden and sell a few fresh vegetables each summer. But they want to take the “extra pocket money” they made and write off an expensive lawn mower, a tractor and even a truck along with lots of other expenses and WOW they make their refunds grow. And then comes that dreaded IRS letter “ we would like to review your business” Now we have a mess and they want me to fix it.

IRS says we have to decide, is this a hobby or a business? A business should have a key feature that the taxpayer is TRYING to make a profit. 

Many legitimate businesses start out with a loss their first few years. But the IRS expects that a legitimate business will be set up to make a profit, not just have a hobby. Unfortunately, some people start "businesses" that are really hobbies just to claim the expenses and the loss on their tax returns. The IRS presumes an activity to be a business (to be set up to make a profit) if it has a profit in at least three of the last five years. 

So when you consider setting up a Business, ask yourself… Are you prepared to show a Profit which means you will pay taxes on the profit? Does the increase in your refund for 1 year, worth the risk you are setting up for yourself for an audit?

https://www.irs.gov/newsroom/hobby-or-business-irs-offers-tips-to-decide

https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expen