Business Losses - How many years can my business lose money?

Question

I started a business 6 years ago and didnt do much bookkeeping then. I used an inheritance for funding but, according to my new office manager, apparently never made any real profit - just spent the inheritance. I closed in 2006 with no revenue and lots of expenses. I still have expenses related to the business. Now I have a full time employee job and taxes withheld. With good records and real expenses, can my business loss offset my current tax liability if I show no income or losses for the prior 5 years?

My inheritance was German and I am a German citizen so taxes were paid there. I have receipts to show massive losses but can keep them in a box and claim only enough receipts to show ZERO income. If I were to be audited, I would have plenty of extra deductions.

I paid no taxes and had no income so I wasnt required to file according to the IRS guidelines.

The income I have is for 2006 - the same period as the expenses.

I made like 35K but lost close to 20K in 2006.

Gourmet food company - 7 trucks, licensed and legal. Have records for all expenses - including warehouse. I just thought my 2k per day was profit - instead it was cash flow - not the same thing!!!

Business operated 6 days per week and had all required licenses. Used sub-contractors for employees by leasing them the truck for sales.

I didnt have enough mark-up between wholesale and retail to pay for warehouse, insurance, utilities, advertising, etc. I used a business bank account and have all the checks and records to assemble. The inheritance monies were wired from Germany to my bank account but show as loans against the German trust - non-taxable according to my records - especially since all money was lost. I still have 3 trucks to dispose of and over a ton of steaks but may have to donate all of them since I work 7 days per week now.

I made close to 40k per month gross profit for 3 years...expenses were more than profits for all years. SInce I never ran out of money, I kept it open - no more German money - oops, cant continue to operate!

Answer 1

Your risk is that the IRS will say that your business is not a business but a hobby and that the expenses from running a hobby are only deductible to the extent that the hobby earns income. In other words, net losses would not be deductible against other income. There are nine factors in the regulations, but the most important factors are the likelihood of earning a profit and whether the activity was conducted in a business-like manner. Your stated lack of business-like records for prior years will not help. You don't state what the business is. If it is the rental of a house, something that derives no benefits and if rents are at fair value for the house, your contention that it is a business would be more likely to be upheld than if the business were in raising purebred dogs or show horses, where the potential for deriving pleasure from the activity is strong.

Answer 2

what do you mean you didn't have to file? you have to file anyway just because you had expenses. It doen't metter if you are a citizen of Germany. You are doing business in the US. Therefore, you have to report. I can't answer specifically how many years you have to be profitable and what do you mean by this. Nobody has to. However, if your business is partnership, LLC(treated as partnership for tax purposes), S corporation, or you are simply a sole propriator your business has to be profitable 3 out of 5 years or IRS will dissalow expenses that acceed your revenue(i.e. making your net income not less than $0)

Answer 3

Your tax liability is calculated on a year on year basis - you can't 'carry over' last years LOSSES to claim against this year's income, unless you are somehow paying for those in this year... for example, by repaying a loan.

Also remember- income from an inheritance is also taxable - you may be opening a can of worms if that end wasn't sorted at the outset!

Also - it sounds like you didn't complete your tax returns in previous years (bad records?)

You also say that if you show NO income and NO losses... how do you wish to accomplish this?

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Answer 4

1

Answer 5

until you run out