When I attach this statement, do I just write a brief description including the Tax ID number of my S-Corp and the loss amount stating that it comes from the 2003 1120S? Or should I also attach a copy of the 2003 1120S to this statement? Or include a summary computation (from the 1120S) on the same page as the brief description?
ANSWER: Just use a brief statement about where it comes from, including the name of the business and TAX ID number. The IRS may request additional evidence later. But, they do not like to get large packets at first. A simple note will do. Put the note on an a full sheet of paper, and make your coments less than half a page if you can. Identify the note at the top with your name and SSN, tax year, then on second line RE: name of company, company tax id, net operating loss carryover from tax year____.
S-Corp Profit. You should be doing a schedule E for 2004, and then carry any income or loss to line 17 of form 1040. (current year income and losses) Carry over losses still goe on the other income line.
Your QUESTION: since my payroll service deducted federal and state taxes for me, it is possible that deducting the entire $11,000 of 2003 NOL will cause me to calculate a refund amount on the 1040 for 2004. (I haven't finished the 1040 yet.) But since I am filing my 1040 for 2004 more than 3 years late, I understand that I would forfeit that refund. If so, can I deduct only part of the 2003 S-corp NOL (for example, to bring me to a 1040 refund amount under $50, which I would forfeit), and then carry over the remaining 2003 S-corp NOL to my 2005 form 1040?
ANSWER: I am sorry the IRS will expect that you apply the whole NOL in succeeding years until it is used up. If you do not, then the IRS refigures it for you or asks you to submit an amended return.
You state: recall reading something about not showing an S-corp loss for more than 2 or 3 years in a row because the IRS will conclude the business is a hobby / tax dodge. However, if I did have an S-corp loss for 3 or 4 years in a row, but during those years I was paying myself a salary (Compensation of officers) that is larger than the loss each year, this would not look like a hobby to the IRS, would it?
ANSWER: This is a general rule that does not hold true in every case. They may deside it is a hobby, but not necessarily so in your case. I have a client for example that lost money on his rental unit for 5 years. During an audit, the IRS added back in the depreciation, and that showed a profit, so he was still allowed to treat the residence as a rental and take rental deductions.
The actual rule of thumb is: If a business reports a net profit in at least 3 out of 5 years, it is presumed to be a for-profit business. If a business reports a net loss in more than 2 out of 5 years, it is presumed to be a not-for-profit hobby.
If you cannot meet the 3-out-of-5 year rule (3 years of profits in a 5-year period), you can still prove your profit motive using the following nine factors:
- You carry on the activity in a businesslike manner,
- The time and effort you put into the activity indicate you intend to make it profitable,
- You depend on income from the activity for your livelihood,
- Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
- You change your methods of operation in an attempt to improve profitability,
- You, or your advisors, have the knowledge needed to carry on the activity as a successful business,
- You were successful in making a profit in similar activities in the past,
- The activity makes a profit in some years, and how much profit it makes, and
- You can expect to make a future profit from the appreciation of the assets used in the activity.