So I'm getting ready to file. I got a warning since I'm taking a loss on my home business for probably the 5th year in a row.

If the IRS challenges me about my home side business, what does that look like?

I have:
-A business license
-A Federal Firearms License/log books
-A business email account
-A business website
-A business instagram account
-A business checking account
-I keep all my receipts
-I have an Excel spreadsheet tracking current and past customer jobs
-I use my profits to expand my tooling since I literally started with nothing but common hand tools

In 2018, I collected 3x more cash from customers for parts and services than I did in 2017.

Does this trigger an audit or do they just send a letter and ask for proof?

Tony.

May I suggest you ask an actual CPA or other tax professional?

People here will answer, with the best intentions. Some will be right, and some will be wrong, but it will be hard for you to know who is right and who is wrong.

Given the consequences of being wrong, shouldn't you be sure of being right?

quote:

Originally posted by jhe888:
May I suggest you ask an actual CPA or other tax professional?

People here will answer, with the best intentions. Some will be right, and some will be wrong, but it will be hard for you to know who is right and who is wrong.

Given the consequences of being wrong, shouldn't you be sure of being right?

This is your answer right here. The same can be said about medical questions as well.

Jim

I assume the warning is from your tax software and not the IRS?

Do you still have a loss if you remove any losses that were carried forward from prior years?

You say you are plowing "profits" back into the company. Are your tax losses due to accelerated depreciation methods or fully expensing equipment in the current year by taking Sec. 179?

Do you show a profit on your books, but loss on tax returns due differences in accounting?

Are you actually trying to make money, or is this enterprise a hobby?

Do you have a business plan that covers the next several years and shows how you intend to earn a profit?

I'm no longer a CPA and I'm not an expert, but these are some basic questions that come to mind. Starting a business and losing money is very common. Even for a number of years.

quote:

Originally posted by jhe888:
May I suggest you ask an actual CPA or other tax professional?

People here will answer, with the best intentions. Some will be right, and some will be wrong, but it will be hard for you to know who is right and who is wrong.

Given the consequences of being wrong, shouldn't you be sure of being right?

Best answer

quote:

Originally posted by trapper189:
I assume the warning is from your tax software and not the IRS?

Do you still have a loss if you remove any losses that were carried forward from prior years?

You say you are plowing "profits" back into the company. Are your tax losses due to accelerated depreciation methods or fully expensing equipment in the current year by taking Sec. 179?

Do you show a profit on your books, but loss on tax returns due differences in accounting?

Are you actually trying to make money, or is this enterprise a hobby?

Do you have a business plan that covers the next several years and shows how you intend to earn a profit?

I'm no longer a CPA and I'm not an expert, but these are some basic questions that come to mind. Starting a business and losing money is very common. Even for a number of years.

Yes, the warning is from the tax software, not the IRS.

I am fully depreciating tools and assets on 179's.

I do plan on making money with this someday (it's in my head, not laid out on paper, but my efforts and log books can support that). My goal is to have a business savings account that I can use to pay taxes throughout the year, purchase a vehicle and open an extra retirement account (401k). If it grows bigger, I'd like to leave my day job and do it full time. I still work 50 hours a week at my day job. However, the M14 market is a hard one, but I do have the name recognition and the optics that others don't and it's hard earned.

I also moved into a house that was 2x bigger two years ago (wife became an OR nurse four years ago, so we upgraded), so last year was my first full year with a larger footprint, a larger mortgage and higher home expenses (a percentage of which is a home office deduction). I had to pay an electrician to power my new-to me mill and lathe, plus purchase tool heads and cutting bits to be able to use them. I might take a loss one more year and I predict I will be in the green. I have also seen my traffic pick up (my gunsmith logbooks indicate a traffic increase year over year). Oregon property tax is absurd, so that helped.

So in reality, I can easily prove and plot a trend of a growing business that's still in its infancy.

I just want to know what to expect if/when the IRS comes asking. Do they come in letter form or does someone come visit and is it in audit form?

Thanks,

Tony.

Yes, your software is giving you the warning. And, where it's "head is at" is the difference between a business and a hobby.

There are two ways to avoid the hobby loss rules. The first way is to show a profit in at least three out of five consecutive years (two out of seven years for breeding, training, showing, or racing horses). The second way is to run the venture in such a way as to show that you intend to turn it into a profit-maker, rather than operate it as a mere hobby. The IRS regs themselves say that the hobby loss rules won't apply if the facts and circumstances show that you have a profit-making objective.

So, you are golden if you meet the 3 of 5 test but you are not necessarily screwed if the "facts and circumstances" indicate a "profit motive".

Go to IRS.Gov and search for "hobby loss" there should be a laundry list of "factors" that are considered as to whether an operation is a business or a hobby. Stay within those guidelines, keep good records and documentation and "run it like a business" (which it appears that you are) and you should be able to survive an exam if it ever comes to that.

I am CPA and did not stay in a Holiday Inn Express last night!

And, you might want to consider using "bonus depreciation" rather than S 179. 100 pct bonus has the same effect on the current year as 179 but 179 has recapture provisions while bonus does not.

quote:

May I suggest you ask an actual CPA or other tax professional?

^^^^^^^^^^
Yep. Kind of like do you think this is CANCER question. The consequences are too big, besides the CPA advice is deductible.

The post above mine is from a CPA so that is a good start. If he sends you a bill, you can deduct that.

If the IRS has questions, they will send you a letter. They may audit you. It sounds like you have the records to back up what you are claiming on your returns. The home office deduction is a flag for them as it's been abused often.

The main concern is whether your business is a hobby or an actual business. You have to have a valid profit motive for it to be classified as a business and thus be able to deduct losses from it.

It's possible to have income on your books and show a loss on your tax return which why I asked about your depreciation and Sec 179 expenses. Since you mentioned plowing "profits" back into the business, I'm assuming you have book income, but you have tax losses due to accelerated depreciation and Sec 179 expenses. If this is true, I don't believe you'd have an issue if you were audited. You are keeping books, right? You can produce a balance sheet and income statement for your business for each year of operation?

I'll cover my butt by saying that paying someone with current experience for an hour of their time would be money well spent.

quote:

I just want to know what to expect if/when the IRS comes asking. Do they come in letter form or does someone come visit and is it in audit form?

^^^^^
I run a small business. They send letters in regular mail. You send a reply it takes a LONG time.

quote:

Originally posted by benny6:

I just want to know what to expect if/when the IRS comes asking. Do they come in letter form or does someone come visit

Isn't it usually a phone call with a demand for a credit card number in order to avoid arrest? I have received a few of these.

quote:

Originally posted by V-Tail:

quote:

Originally posted by benny6:

I just want to know what to expect if/when the IRS comes asking. Do they come in letter form or does someone come visit

Isn't it usually a phone call with a demand for a credit card number in order to avoid arrest? I have received a few of these.

The people that demand a credit card number and claim you will be arrested are scammers, not the IRS, and you should report that to WWW.TIGTA.GOV an IRS employee will never ask you for a credit/debit card number.

Instead IRS employees on the phone will direct you to WWW.IRS.GOV and to search for credit/debit card payments or IRS DIRECT PAY. They can also tell you where to send a check and what to write on it.

The IRS will send letters first prior to other forms of contact.

Of course if you haven't updated your address they could be sending them to an old address.
The IRS only gets their address updates when you file a new tax return, a Form 8822, or calling them and having an employee update it after you've verified your identity.

Most audits(called examinations by IRS) are done through Correspondence Examination. This means you receive a letter at first stating your 1040/940/etc return for X time period is under examination and you now need to submit certain documentation depending on the scope of the exam in order for the IRS not to change the return, often by wiping out deductions or business expenses that the taxpayer can not prove via receipts/etc.

In others you could be assigned to a Tax Compliance Officer(TCO) who would handle the examination and would ask you to come visit them at their office with your proof/documentation.

In other cases you could be assigned to the field with a Revenue Agent(RA) or Revenue Officer(RO).

Basically correspondence exams are done by the lowest level employees in exam. TCO's handle mid-level and RA's handle mostly small businesses/higher level audits.

An RO doesn't audit though, they collect on balances and delinquent tax returns. They're the ones that can levy your wages/bank account/seize your cars/house/other assets and sell them.

A Revenue Officer will show up cold without sending any warning.

On the other hand a Revenue Agent will often send a letter asking for an appointment/meeting. You'll have to verify expenses/deductions/items on the return with documentation.

quote:

Originally posted by Austin228:

quote:

Originally posted by V-Tail:

Isn't it usually a phone call with a demand for a credit card number in order to avoid arrest? I have received a few of these.

The people that demand a credit card number and claim you will be arrested are scammers, not the IRS,

He sounded legit, even though I could barely understand him through his accent.

I did make a few comments about his ancestry and his sexual and sanitary habits. That was just before he told me that he was going to come to my house and do unspeakable things to me. I offered to give him directions because it's tricky to find, and I offered to give him the code to open the gate, but he did not seem to appreciate my cooperative attitude.

If you're expecting revenue to increase in future years you should rethink electing section 179 depreciation.
There were quite a few changes to the tax code for 2018 and even more changes for self employed filers.
It's getting down to the wire for filing 1040's for 2018 but email is in my profile if you need it.

quote:

Originally posted by Sailor1911:
Yes, your software is giving you the warning. And, where it's "head is at" is the difference between a business and a hobby.

There are two ways to avoid the hobby loss rules. The first way is to show a profit in at least three out of five consecutive years (two out of seven years for breeding, training, showing, or racing horses). The second way is to run the venture in such a way as to show that you intend to turn it into a profit-maker, rather than operate it as a mere hobby. The IRS regs themselves say that the hobby loss rules won't apply if the facts and circumstances show that you have a profit-making objective.

So, you are golden if you meet the 3 of 5 test but you are not necessarily screwed if the "facts and circumstances" indicate a "profit motive".

Go to IRS.Gov and search for "hobby loss" there should be a laundry list of "factors" that are considered as to whether an operation is a business or a hobby. Stay within those guidelines, keep good records and documentation and "run it like a business" (which it appears that you are) and you should be able to survive an exam if it ever comes to that.

I am CPA and did not stay in a Holiday Inn Express last night!

And, you might want to consider using "bonus depreciation" rather than S 179. 100 pct bonus has the same effect on the current year as 179 but 179 has recapture provisions while bonus does not.

I'm just highlighting the answer from a professional. I think this is the best answer you'll get next to seeing a CPA. If you're using software, some of them offer a service where you can consult with a real CPA.

Thanks. I've got 4x verification! Talked to two other CPA's on TurboTax as well. I'm good, but should consider holding off on further big purchases in the coming year or two and focus on building the bank account.

Thanks Sailor and Trapper!

Tony.

Side note: have you thought about incorporating your business and paying yourself a small W2 salary?