If I make a big investment and file at $15000 loss, will it increase the chance of an audit?

Question

I did my taxes with a tax program to get a clear picture before the year ends.
I'm an employee who started my own business, but it didn't do good, so I'm trying a different thing that requires at least $25k investment in equipments. I'm thinking of doing one now before the year ends for 8k, which will put my business at a loss of $15k, but will return a tax refund of $4k.
What I am concerned is how will the irs take this?

Answer 1

stop being cheap and get a CPA right away it will save you money.

Answer 2

Stephen and Dino make some good points in their answers.

From your message, it sounds like the new $25K equipment is for a startup venture. If you do not open for business in 2007 you cannot deduct any of the cost of the equipment. The primary factor is the date placed in service, not when the equipment is purchased.

If the business is started in 2007, in order to expense (via Section 179) the equipment you must have business profit of that amount prior to the expense. That is because 179 cannot be used to create a loss. When determining your profit from business for the purposes of 179, though, your W-2 earnings count as business income.

As far as the IRS is concerned, as long as you have documentation and your return is prepared correctly there is no need to be worried even if you are selected for audit. I would be concerned in your case, however, about whether the return was prepared correctly. It sounds like you might be in over your head at this point, and I would recommend a tax professional.

As a note, do not rely on tax software if you do not have an understanding of taxation at least equal to your circumstances. Their claims that anyone can correctly prepare their own return using software are wildly exagerated.

Answer 3

As Ed mentioned most businesses show losses in the first year. Whatever happens, you should have all the paperworks to back up the deductions. Claiming the business loss would not necessarily increase your chance of being audited, however other things can trigger it. In case you're audited, the first thing IRS will check is if your deductible expenses were really "Ordinary and Necessary" for your business.

IRS says: "To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary."

Remember, you must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business.There are, in general, three types of costs you capitalize.

- Business start-up cost (You can elect to deduct or amortize certain business start-up costs.)
- Business assets
- Improvements

I'm almost sure, by now you just want to see a CPA or an other tax professional about your tax matters, but really it is not that bad. Probably you should get help from a tax professional this year, so you can learn! If you need more information on business expense, please click on below link:

http://www.irs.gov/businesses/small/article/0,,id=109807,00.html

Answer 4

Not necessarily an audit.
Many/most businesses show a loss the first year or longer.
Just be sure that you have all the paperwork to back up deductions.
It may help to have an outside tax preparer to prepare your return. It will appear more professional and not subject to as much scrutney.

Answer 5

Investment in equipment must be depreciated (deducted over several years according to a specific schedule that depends on the type of equipment). You are not allowed to deduct it all at once.

Answer 6

Diego,

I would go to a CPA with this question.
If you do get audited, could you face the auditor or a judge and say, "Well, I got my advice from Yahoo answers."