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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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I sell Avon. How many years can I claim a loss Someone said

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I sell Avon. How many years can I claim a loss? Someone said if you claim a loss for more than 3 years it is a hobby and shouldn't claim it.
Hello mlswanson,

You may claim a loss for more than 3 years, but once you claim losses of more than 3 years in a 5 year period, then you are inviting an audit by the IRS. At that point they would ask you to prove that your business is really intent on making income, and not just a hobby.

To prove that your business is intent on making income, they would look at such things as whether or not the business ever made a profit, what steps are you taking to turn the business around and make it profitable, and are you dependent on profits from the business as part of your normal livelihood.

If you cannot at that point prove that you intend for your business to make a profit, then the IRS would disallow your deductions, and reclassify your business as a hobby expense.

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Thank you.
Customer: replied 8 years ago.
So, how do I claim it as a hobby then. Do I need to note that on my tax return somehow or just not report anything?
Hello again mlswanson,

Hobby losses are not deductible, except up to the amount you receive as income.

In other words, if you have a hobby of selling homemade craft items, and you make $1,000 for the year in sales, then the most you can claim as expenses is $1,000. You cannot deduct any excess losses from hobby income.   Losses can only be claimed if you have a legitimate business.

That is why after 3 years of claiming losses, the IRS starts to question whether or not you really have a legitimate business intent, or if this is just a hobby that you are trying to disguise as a business for the purpose of claiming losses.

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Thank you.
Customer: replied 8 years ago.
One more question then. So, on my taxes I still need to put the amount the I say was income and then if my expenses were more thatn that, I should just claim expenses as the same about as what my income was. There is no where to input this is a hobby. I just need to put it on my taxes anyway correct.
Hello again mlswanson,

Hobby income is reportable on your Form 1040 on the line for "Other Income".

Deductions against your hobby income can only be claimed as a misc. deduction on Schedule A if you itemize your dedctions.

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Thank you.
Customer: replied 8 years ago.
So, back to may main question to you as the tax expert. If this year my expenses again where more than what I made, I should just claim expenses up to my income so I don't have the IRS on me and be checking it out. Is that a good solution?
Hello again mlswanson,

In my opinion, that would be the best solution. By doing it that way, you can at least exclude all of the income you did have from selling Avon, and not have to pay tax on the income as income from a hobby. At the same time you would not be reporting an actual loss from your Avon business, and should not be scrutinized by the IRS for claiming a loss for more than 3 years.

Thanks again.
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Customer: replied 8 years ago.
That is perfect. Thank you so much.