Business Income/Loss question...?

Question

I had a licensed gourmet food delivery company since 7/2000 that I used loans against a trust to set up and buy equipment. I had a warehouse and 7 vehicles in addition to product. I subleased my trucks to the salesmen so I didnt have any employees and ran the business 6 days per week myself...

I didnt do any accounting for years but have all the reciepts and legit expenses. I hired a woman to complete my tax returns on my 3rd year in business and she discovered that I wasnt actually making any money. In fact, despite 60K per month in sales, I lost money every month of each year and survived on cash flow and advances from the trust account.

I have never filed tax returns but have all records. Now, I work as an employee and have taxes withheld from my check.

I need to "close" the business. If I show zero net income and only use enough receipts to make this happen, can I deduct losses in 2006 against my income from 2006?

The woman is a professional bookkeeper that I hired to prepare the documents for doing tax returns.

I understood if you have no tax liability that you do not need to file.

I am German - not American - so not real sure of how to do USA taxes. I also have some trouble with reading and understanding all the tax code books since German is my first language.

Answer 1

I would lean towards.......maybe.

The problem is that (usually) having losses every year for six years means that you have a "hobby" and not a "business" and hobby losses are not deductable. I IRS may have trouble believing that someone was losing money for years without knowing it.

Here are some items from IRS.gov on hobby vs. business:

You carry on the activity in a business-like manner,
The time and effort you put into the activity indicate you intend to make it profitable,
You depend on income from the activity for your livelihood,
Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
You change your methods of operation in an attempt to improve profitability,
You, or your advisors, have the knowledge needed to carry on the activity as a successful business,
You were successful in making a profit in similar activities in the past,
The activity makes a profit in some years and the amount of profit it makes, and
You can expect to make a future profit from the appreciation of the assets used in the activity.

The fact that you never claimed any business losses in the past (2000-2005) I think would tip the scale to "hobby" and not business and the 2006 "losses" would not be deductable.

Answer 2

You have to file whether owe or not. Any losses/refunds you may be due from 2003 & earlier are now lost. Don't play around in 2006. Just file the true numbers and - if a loss - can deduct. viel geld ;)

Answer 3

You said that you hired a "woman" to do your taxes. I'm assuming from this verbage she was not an accountant. I think it would be a good idea to schedule an hour consultation with an accountant/tax lawyer to address your concerns. If they can help you it may be worth hiring them to complete the closing of the business.

Answer 4

Yes but why limit yourself to show zero net income? If you can prove a net loss that can be deducted against other income like W-2 income.