Reporting a business loss on your taxes?

Question

After you have claimed a loss for three years on a home based business and it still was a loss in the 4th year, can you claim those losses or should you stop claiming the loss?

Answer 1

Keep reporting the losses. However, as the others stated, make sure that this does not qualify as a hobby.

Answer 2

I have been a tax accountant for 27 years, specialzing in small business taxation. The so-called "hobby rule" (to which you refer) requires that in order to be considered engaged in an activity intended to make a profit the business must show a profit in any 2 of its first five years' of existence. But this is no hard and fast rule. There can be, and are, many exceptions. How you run your business is as important as whether it turns a profit. The type of business should be of the kind that usually makes a profit. And the making of profit must be the central design of the business.

While any tax professional worth his or her salt would recommend that you force a profit for years 4 and 5 (you force a profit by not taking all deductions), even this measure ulitimately will not be deteminitive. It's the combined weight of all the relevant factors that seals it.

If you are in the sort of business that has profit potential but needs more time to develop, you can apply to IRS for an extension of the 5-year rule.

Additionally, give serious thought to consulting a tax professional. By looking at your prior returns, he or she should be able to tell you if you are eligible to claim refunds from prior years due to what is termed "a net operating losss" (NOL). An NOL exists when the total of your business losses in one tax year exceeds your non-business income. This is a specialized calculation and should be done by an experienced professional.

Answer 3

If you are really trying to make a go of the business, you can go ahead and claim the losses. You will very possibly have to prove to the IRS that you're not just doing whatever you're doing as a hobby. See http://www.irs.gov/newsroom/article/0,,id=169490,00.html