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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
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Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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Claiming a loss on a home based business.

Customer Question

I've had a home based business that I claimed losses on for 3 years. My tax expert told me last year that if I claim it a 4th year, then it could be considered a hobby & has a high chance at being audited.

Now it's my fifth year, and I'm wondering if I qualify for the new law that extends net operating loss carryback for small businesses (up to 5 years)? The info I found was at "http://www.irs.gov/newsroom/article/0,,id=205329,00.html"

Could I qualify for this credit? If not, what disqualifies me?
Submitted: 5 years ago.
Category: Tax
Expert:  Ed Johnson replied 5 years ago.

Dear Lakerfan,

 

First I would like to correct an assumption that I see. Your tax expert is generally correct, but not necessarily so. Even if you are operating at a loss, you may under certain circumstances still be able to avoid classification as a hobby.

 

There is a chance of an audit especially if you are a schedule C filer. The IRS has doubled the audits for schedule C filers, because they have found that they are responsible as a class of tax payers, for 65% of all under reporting of income and abuse of deductions.

 

Eligibility is that you have a legitimate business and file taxes as a business and meet the following criteria:

 

To qualify for the new five-year carry back provision, a small business must have no greater than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL. Businesses with more than $15 million in gross receipts still qualify to carry back their 2008 NOL for two years

 

What would make you ineligible is that you are not a business or that you had to large a gross receipts.

 

As long as your gross receipts do not exceed 15 million, and you are an operating business, then you are eligible.

 

What do I mean by an operating business?

 

If you file a schedule C and operate a sole proprietorship such as your home based business, then you have business operations and file as a business. You file a schedule SE.

 

If you are an LLC or S-corp and do not have more than 15 million in gross receipts, you are eligible.

 

If you are a partnership and file schedule E for partnership income, and you earn 15 million or less in gross receipts, you are eligible.

 

Being an eligible business means, operating as a business and having 15 million or less in gross receipts.

If you have more than 15 million in gross receipts you are not eligible.

http://www.natptax.com/rp200919.pdf

 

 

Use form 1045 to file your NOL http://www.irs.gov/pub/irs-pdf/f1045.pdf

 

 

Customer: replied 5 years ago.

Hi Edward,

 

So if I'm understanding you correctly; I do qualify for this tax advantage. However, I'm twice as likely to be audited because I will be filing a schedule C?

 

My income from the business was about $550 for the year. My expenses for training, tools, airfare, ticket costs, parking, hotels, gas, and mileage comes in somewhere around $4,000. Does this have any bearing on my chances of being audited?

 

I guess that I fear the IRS like the CHP that catches me doing 90 on the freeway. I'm so scared of an audit, that I would rather pass on the tax break that I deserve if it gives me a much lower chance of an audit.

Expert:  Ed Johnson replied 5 years ago.

Dear Lakerfan,

 

If you filed a schedule C, that would be correct, because as a class, beginning in 2008, schedule C filers were identified for increased audit activity.

 

If GROSS income is 550 dollars,and your excess expenses are 4,000 dollars, and this is your 3d or 4th year of business, it could be a red flag. The issue is that Whether you file schedule E or C will not matter, because one of the areas that is considered high abuse is travel expenses and mileage. But if the 550 is net income, then you might not have an issue.

 

I would recommend treating excess travel expenses as unreimbursed employee business expenses on form 2106.

 

I can not guarantee you would or would not be audited in this instance. Your main concern seemed to be that if you were elgible for the net operating loss carryback, and you would be. I have clients who have been marginally profitible for years, and have never been audited,even when In my opinion there was a high chance.

 

Your concern is really much deeper than that on an emotional level. You are concerned about being audited. One should never fear an audit as long as you have your mileage log,and can show business activity and can make your best argument to justify the expenses, as business related. In the worst case scenario, you may have to pay back some taxes and pay interest and penalty on it. That to me is the cost of doing business. If they determine you are a hobby, then they would not allow the business losses beyond the amount of revenues, and have to pay back some tax with interest and penalties.

 

The CHP can cause your car to be towed, impounded, and you can draw jail time or have you licenses suspended. Your driving record can increase your insurance for up to 5 years. How can one operate a business, find employment and live in CA wihtout a car. Things are spread out so much. losing your mobility in CA is a serious event. I think you fear of the CHP would be much more than the tax auditor; but every one fears the tax auditor more.

 

 

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
Ed Johnson and 7 other Tax Specialists are ready to help you
Customer: replied 5 years ago.

Edward you are great! One more quick question. II have a Schedule C, W-2, 1099-C, and 982 to file. Using Turbo Tax; everything seemed to be smooth sailing until I got to the form 982 to claim insolvent. Would Turbo Tax be a sufficient tool to complete my return, or is my filing a little to complex?

 

Thanks again for your help,

Jeff

Expert:  Ed Johnson replied 5 years ago.

Turbo tax can handle the form 982,

 

However , if your tax adjustments includes cost basis for items that were depreciable, and you did not carry forward the prior year depreciation from a prior year return, you may have to do some overrides, to make sure you have entered the correct depreciation where appropriate.

 

Form 982 can be complicated and many people find it useful to have a professional take a look at the final result before sending in their return.

 

 

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Ed Johnson
Ed Johnson
Tax Professional
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GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee