Does the IRS limit the number of years a small business can claim its losing money ?

Hello all,

I am beginning to make the painfull step of learing about the IRS and income tax stuff, Instead of dumping it all on an accountant.....I am sure I will still "dump" for several years but want to begin learnin some.

Thanks
Dave Lawrence

Yes, it does. 3-4? 7? Don't know, but there's a limit at which it becomes a hobby, and not a business. If you trim expenses enough to show a profit, even a small one, that may reset the clock. Note: not legal or financial advice, merely the coffee-fueled rumination of a madman.

Chip

You can get your generalities here...but find, hire and use a good accountant before acting on anything.

Free advise is worth every penny you pay for it...and that is even if coming from a good accountant your not using.
My accountant screws up, it comes outta his arse meat too...kinda changes whether he answers before getting all the info.

For a Small Business...consider not making or losing, but breaking even.

I don't think there are hard and fast rules. The general rule is you must be engaged with the intent of making a profit. If you have significant income from other sources and constantly show a loss on a small business that tends to be a red flag. There are quite a few cases where this was tried with things like horses and racing.

You will be viewed differently if you are driving a 30 year old truck, sleeping in the shop, and living on beans and rice than you will if the business owns a bass boat and a sky box at the football stadium, both written off as "customer entertainment".

Chip Chester said:

Yes, it does. 3-4? 7? Don't know, but there's a limit at which it becomes a hobby, and not a business. If you trim expenses enough to show a profit, even a small one, that may reset the clock. Note: not legal or financial advice, merely the coffee-fueled rumination of a madman.

Chip

Click to expand...

Need another cuppa meself, but IIRC the US IRS yardstick "was" on on a five-year slider, three years of five in-profit for each given year, cumulative gain or loss a different issue.

Best to get up-to-date advice from a pro.

US Congress has averaged around three tax-code changes per DAY, every day, all year, every year for scores of years. The IRS 'experts' snatch themselves bald-headed trying to explain those to the public - or even their own experienced staff.

Tax complexity is not really the fault nor preference of the IRS - they are f****d just as badly as WE are.

FWIW - Hong Kong didn't care, so long as a/the Director(s) would sign a bit of paper personally guaranteeing to cover the losses. And DO SO, of course.

Sensible, that, but the Brits have always done better work at civils overseas than they do at home, so...

I worry more about how many years I allow myself to lose money

gbent said:

I don't think there are hard and fast rules. The general rule is you must be engaged with the intent of making a profit. If you have significant income from other sources and constantly show a loss on a small business that tends to be a red flag. There are quite a few cases where this was tried with things like horses and racing.

You will be viewed differently if you are driving a 30 year old truck, sleeping in the shop, and living on beans and rice than you will if the business owns a bass boat and a sky box at the football stadium, both written off as "customer entertainment".

Click to expand...

This. ^^^^^

A good accountant is your guide here, mine have shed clear light on such things, and yours is who will be defending your returns to the IRS if questions ever arise. I have found out that you can carry losses forward against profits for 15 years before they expire. There have been things that were considered hard and fast rules like an owner not being able to take an outsized payroll one year out of proportion to other years that were ruled against by the courts. An accountant's job is to stay abreast of such things and be able to tell you what is important to your situation.

My recollection is that you had to show a profit 3 of every 5 years. Could be they've loosened things a bit -- especially since tech startups often don't turn a profit for several years.

There are lots of folks who like making stuff and hope to have the IRS subsidize that by taking in jobs now and then. Good news for them is that the IRS seems to look the other way; especially if they do everything else right (separate accounts, etc.).

I think the confusion comes from the hobby test. The way my accountant explained it to me is the profit in 3 of 5 years is to show that it has a for profit-motive, which would make it a business instead of a hobby. But you can still be a business and have a loss every year as long as you are a business and are trying to make a profit.

But the kicker is, you have to be/act like a business.

Over here you can make a loss as long as you can afford too. Worth remembering though, you can not ofset any other income's taxation against it. IE you can not ofset the tax you pay at the day job against the loss your hobby or even attempted pro shop makes.

Make no profit for long enough and im sure they will come looking too. Expect them to go through everything with a fine tooth comb and over here, that goes to the level of even looking at if your using machinery for your own personal use which of cause is not tax deductible.

In all honesty its way easier just to make a bit of profit and pay a bit of tax conform to the typical norms and just get on with life.