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Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 3793
Experience:  20+ years of experience in tax preparation; 30+ years of experience as a real estate/corporate paralegal.
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Last couple of years I have been deducting business

Customer Question

For the last couple of years I have been deducting business expenses, but have not made any money at all in my business. Is this a red flag for an audit?
Submitted: 1 year ago.
Category: Tax
Expert:  Barbara replied 1 year ago.

Welcome to Just Answer. My name is ***** ***** I will be happy to assist you.

The IRS understands that starting a business takes time.

The IRS presumes you are conducting a business, rather than a hobby, if you report a profit in three out of the previous five years. So you could operate your first two years without a profit, though no income at all in two years might cause auditors to take a closer look. But even if you show no profit for several years in a row, the IRS may allow your deductions if you can show other evidence that you are conducting a business. For instance, if you conduct your affairs in a business-like manner and devote time and effort toward making the business profitable, if you’ve made a profit in similar activities in the past, if you are trying to make a living and support yourself with the business, or if your failure to bring in income is due to circumstances beyond your control, the IRS may acknowledge that you are conducting a true business and allow your business expense deductions.

The following link contains additional information you will find helpful:

Please let me know if I can assist you further.

Thank you and best regards,


Expert:  Barbara replied 1 year ago.

Just following up with you to see if you have any other questions or concerns. If so, please let me know, and I will be happy to assist you further.

Best regards,