how many yrs can I show a loss?

Question

I am full time employed, and have a business which I do get payed for throughout the year. But my expenses exceed my income. (for the side business) Showing a loss, for the last 3 yrs. This business is the same field as my full time job. My side work is to keep me fresh in my industry. So I spend my own money earned from my full time job..SO, because I do have little income from my side work I need to report that. Yes, I do get 1099's. the loss is minimal, but still a loss..

Answer 1

A lot of your answer depends on your intention. From what you described you likely have what the IRS refers to as a "hobby loss". If you're deducting this loss on your returns you could lose on audit. There is a polethera of case law on this issue - in many cases the taxpayers won by proving they enetered into the business to earn a profit. Profits are not guaranteed. You just need to prove that your intent was to earn one. You need to judge if it is all worth it, if the IRS were to disallow the loss you likely have to litigate to win. (Lawyer & accountant Fees vs. the benfits of the loss.) you can read about hobby losses on the IRS website - www.IRS.gov. To me the amount of cases on the subject only enhances the likelyhood of the IRS being willing to take the issue to court.

If you get 1099's you need to report the income.

Good luck!

Answer 2

There's no hard-and-fast rule. "Three years" is a rule of thumb - HOWEVER...even if you show loss for longer than that - if you can show that you are running the business with the intent of making a profit, it's still legit. I've never experienced an auidt with any of my clients over that issue, so I'm not sure what criteria they use.

Some businesses do take more than three year of loss before they start showing a profit. I suppose, in the event, if you can show them why the loss, and that it's normal for your business, you'll be fine. If they deem it a "hobby", they will disallow the losses. It's murky water. As long as your side business is not something like you and your kid doing the beauty pagent circuit, or you pouring money into your racecar and occasionally racing for a purse (both of which almost never show profit, and are considered hobbies)...

Hmmm. Looks like the best answer I can give you is "depends what your business is". However - I do have one client who is a bellydancer. She teaches, performs, etc. But I think she's showed a profit twice in the last 8 years - and by "profit", I mean "technically" (like $30 net). I keep expecting the IRS to knock on her door and at least ask questions - but maybe they have bigger fish to fry. If it's just been 3 years, I wouldn't worry. Keep pluggin' away at it at the work. Intentions are everything.

Oh yes - if you think what you are doing is a hobby - you STILL need to report the income - but you merely only report enough expenses to bring the profit to zero. So you don't pay tax on it (if in fact you made no profit) - but you can't take losses.

Answer 3

It depends upon your intent. First off, start-up costs must be capitalized, not expensed. You can then deduct them as the business starts to turn a profit.

If you've been in the red for 3 years now, the IRS will likely be taking a MUCH closer look at capitalization of those start-up costs and may well look back to the beginning of the business activity to see if your apparent intent is to generate profit or if it's an attempt to generate tax write-offs. If it appears that it's a tax dodge, the expenses claimed may be disallowed and your current and prior years' tax liability may be re-calculated.