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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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Hi! Were in our 3rd year of an unprofitable small photography

Resolved Question:

We're in our 3rd year of an "unprofitable" small photography business. Due to multiple surgeries we were unable to attend any art/wine festivals last year and were building the business the other two years. We took deductions & depreciations those two years.
*Can we continue with our business?
*Can we start over under another business name?
*Will the IRS likely audit us?

Thank you soooo very much for your assistance. -Jeannette
Submitted: 6 years ago.
Category: Tax
Expert:  Merlo replied 6 years ago.

Hello teix,


If you report a loss from your business in 3 of the last 5 years, the IRS is very likely to audit your return, as this makes it questionable to them that you are really in this business with the intention of making a profit. Starting over under a new business name will not change that issue.


If you were to be audited, you would have to be able to show substantial proof that despite your best efforts, a profit was not made. You would need to be able to show steps that you have taken to change or improve your business strategies, or show that you increased your advertising or changed your marketing plans or things of this nature, which could help establish your true intention of making a profit at this business. If you cannot show that you have a viable business plan in place and that you have made efforts to make this business profitable, then the IRS would end up disallowing these losses.


Since last year your were unable to actively work at building this business due to personal reasons, in the event of an audit it is highly unlikely that the IRS would allow you to claim these losses. That being the case, you may want to consider not claiming any losses this year, and hoping that next year is more profitable for you.


If this was helpful please press the Accept button.


Thank youCustomer/p>



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Customer: replied 6 years ago.

Hi Merlo,


So, it's okay not to claim any losses or deductions in '09 and continue with the business and not have the IRS potentially flag us for the 3:5 years non-profitable rule. Is there a formula that the IRS uses to determine what profit is? We don't know how much we have to earn in order to be "profitable." Thanks. -jeannette

Expert:  Merlo replied 6 years ago.

Hello again tei,


You do not actually have to show that you are profitable. The issue is more that you do not want to show a loss in more than 2 of the last 5 years, or else you are really inviting an audit. You do not particularly have to actually show a profit, but rather you do not want to take deductions for a loss more than 2 out of 5 years.


And yes it is okay not to claim a loss or claim deductions, even though you may have some which you woud like to claim. You would need to continue claiming any depreciation allowances that you started claiming on equipment purchased for the business, as you cannot just skip a year on claiming the depreciation and then pick up on that again in a later year. But hopefully you have at least enough income to offset those depreciation expenses. But other expenses which you had do not necessarily have to be claimed if it will keep you from showing a loss. These will just be losses that you receive no credit for, but at the same time you will help avoid an audit.




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