I got a 1099-MISC for 650. I declared a -2,300 business loss from it as a sole proprietor is that a red flag?

Question

Essentially I did a little computer repiar work for a small company and they paid me 650 that year it was non-employee compensation (box 7). I put it in turbotax and it states the IRS will take this as self employment. In that case I put in the SF of my home office and my mortgage expenses as well as my utility bills. I didn't go crazy with it but it seems a little weird to lose -2,300 over 650. I have recipts and proof to back it. It lowered my Adusted gross income by -2300. Will this raise any problems?

Answer 1

Yeah, that's a BIG red flag!

Any time you show a loss like that the IRS is going to question it.

The Home Office deduction is always a tough one. You must use the area solely and exclusively for business purposes. Any personal use at all disqualifies the deduction. And claiming HO expenses for an entire year against the income from what appears to be a single engagement is completely out of line.

Hopefully you haven't filed that fishing expedition yet. Re-do the Schedule C with only the reasonable business expenses directly related to the job. Forget the HO deduction; it just won't fly. If you had any travel costs related to it, those would be reasonable, as well as any direct expenses incurred.

If you have filed, I'd strongly urge you file an amended return PRONTO, before the IRS comes questioning your numbers.

Note: Start up costs for a new business must be capitalized. They may be expensed in future years once the business starts turning a profit. You can't just take a huge write-off in the first year for the start-up costs even though they would normally be allowable business expenses.

Answer 2

The loss won't necessarily be an issue, but the home office deductions will probably be a red flag. Do you use this portion of your home REGULARLY and EXCLUSIVELY for your business, or was this just a one-time thing, and you took their computer home with you and worked on it in the corner of your family room. You might or might not be eligible to claim home office expenses, and from your description of "did a little computer repair work", you probably aren't. From the way you describe what you did, it really doesn't sound like you qualify for a home office deduction, but of course I don't know all the details.

Read carefully http://www.irs.gov/pub/irs-pdf/p587.pdf especially pages 2 and 3. If after reading this you don't think you actually qualify, then amend your return. If you still think that you qualify, then just leave it as it is.

Answer 3

Pretty much everyone knows, including the IRS, that when you start a business, you will most likely incur a loss the first year or so. Any business loss will generate a red flag, although they will allow a reasonable loss ($500 of income and $50,000 of expenses is not considered reasonable). The IRS will also look at losses and income over 5 years as well. If you generate losses in more than 2 out of 5 years, the IRS may consider your business as a hobby and then apply the hobby loss rules against it. The hobby loss rules states that you can only deduct expenses to the extent of income, therefore you can offset your income, but cannot generate a loss from the business.

Answer 4

If this was a one time thing and not something you are likely to do in the future no. If you are continuing to do this consulting, make sure your in-home office is exactly that. Dedicated space to serve as an office. it cannot be multipurpose, but it can be a portion of a room if you can't dedicate an entire room to that purpose.