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socrateaser
socrateaser, Lawyer
Category: Tax
Satisfied Customers: 39045
Experience:  Retired (mostly)
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Schedule CIs a taxpayer allowed to deduct expenses on a

Customer Question

Schedule CIs a taxpayer allowed to deduct expenses on a schedule C without reporting any income on schedule C?The situation is a single/no dependents taxpayer who has a w-2 in the amount of 40K as well. Can he report sch c income losses without reporting any sch c income?
Submitted: 1 year ago.
Category: Tax
Expert:  socrateaser replied 1 year ago.
Hello, If the taxpayer has started a new business, and that business is not a hobby (i.e., business has a profit motive), but the business has not yet generate positive revenue above expenses, then the taxpayer can report the expenses. However, in order to deduct those expenses against W-2 wages, the taxpayer must be a material participant in the new business. This means that the taxpayer must satisfy one of the tests found in Treas. Reg. § 1.469-5T(a):The taxpayer works 500 hours or more during the year in the activity.The taxpayer does substantially all the work in the activity.The taxpayer works more than 100 hours in the activity during the year and no one else works more than the taxpayer.The activity is a significant participation activity (SPA), and the sum of SPAs in which the taxpayer works 100-500 hours exceeds 500 hours for the year.The taxpayer materially participated in the activity in any 5 of the prior 10 years.The activity is a personal service activity and the taxpayer materially participated in that activity in any 3 prior years.Based on all of the facts and circumstances, the taxpayer participates in the activity on a regular, continuous, and substantial basis during such year. However, this test only applies if the taxpayer works at least 100 hours in the activity, no one else works more hours than the taxpayer in the activity, and no one else receives compensation for managing the activity.Assuming that the taxpayer is a material participant, then he or she can report the expenses, and deduct them against W-2 wages. I hope I've answered your question. Please let me know if you require further clarification. And, please provide a positive feedback rating for my answer -- otherwise, the website retains your entire payment, and I receive nothing for my efforts in your behalf.Thanks again for using Justanswer!
Customer: replied 1 year ago.
I see. Yes definitely qualifies as a business. He has a degree and has a registered business DBA and he spends hours working as a game designer. Has a website and has many expenses. But no income. He deducted expenses with no income for 2014. Would he be able to do that again for 2015? For 2015 also has many expenses for the production of the game but no income. Or is it only allowed one/first year? However, for 2015 he did receive a 1099M with a small amount under royalties from playstation I believe. Where does that get reported? 1040? Or schedule E?
Expert:  socrateaser replied 1 year ago.
The IRS requires that a business must make a profit at least three years in any five -- otherwise, it is deemed a hobby and all deductions are disallowed for the entire five years. If a business does not earn a profit during the first two years, the IRS will deem it a hobby, unless the taxpayer files an election to postpone the determination until the end of the fourth tax year. The risk is that the business will incur continued losses, and all of them will have to be retroactively adjusted, with a multiyear tax liability as a result. The better process is to simply close the business after the first year, and start a new business. This generally requires forming an S Corporation or LLC with a separate Employer Identification Number (EIN). Or, if you believe that the business will be profitable in its second year, then take the deductions, and there won't be a problem. Re the 1099-Misc, that's Schedule C income, because it presumably relates to the business activity. I hope this clarifies my original answer. Please let me know if you require further clarification. And, please provide a positive feedback rating for my answer -- otherwise, the website retains your entire payment, and I receive nothing for my efforts in your behalf.Thanks again for using Justanswer!
Expert:  socrateaser replied 1 year ago.
Sorry, but I'm "out of gas" -- time for bed. I hope my answers were helpful. Thanks again for using Justanswer!
Customer: replied 1 year ago.
Ok I'm not very clear. So 2015 would be his second year and he had no income so if he claims a loss, it'll cause the IRS to deem it a hobby? And cause all of that mess?
But if he creates an S corp, won't he have to pay $800 a year in CA? And by start a new business you mean he would have to change the business name? Or just the EIN?
Customer: replied 1 year ago.
Sorry my phone died before I can send this last message
Customer: replied 1 year ago.
I'm ready for bed also I will follow up and finalize and rate u tomorrow thank you
Customer: replied 1 year ago.
Hello, I had sent a follow-up question before I went to bed. I wasn't very clear. I kind of understand the situation regarding claiming losses every year. But I'm not sure how closing that business and starting an S corp would benefit. Would he have to change the name of the business or just the EIN? and isn't starting an S corp more expensive since in CA he'd have to pay $800, also, he has no assets to protect so is it really worth becoming an S corp?