Sch C 5th Year Loss?

[SueBaby]

Client has a welding business on the side and he has had the 5 year loss this year. Can I take it this year as a loss on the 5th year or make a profit this year or next ?

Has alot of expenses around this and always a loss. No 1099 just a side job along with his regular job with a W2.

Will this show a red flag to make a loss and not a profit this year or not? Any input with this? Don't want anything to show up later on this. But he insist on leaving it as a loss this year and make a profit next year.

What do you think of this? Hate to redo the whole thing over but if I have to I will to do it right. Thanks for anything on this matter.

[Jiggers]

Welding loss?

What is causing the loss? Sec 179 or bonus depreciation?

It can't be "Material and Supplies".

[SueBaby]

What is causing the loss? Sec 179 or bonus depreciation?

It can't be "Material and Supplies".

Yes alot of depreciation on big items. Even without income or expenses it is a loss with that big depreciation EVERY year.

[BHoffman]

Had a client like that once. She did have a clear profit motive, just no profit. She hired employees, rented a place, and was actually in business. The only things missing were customers.

[Gretel]

If losses are due to depreciation and vehicle expenses and client can clearly establish profit motive than there is no need to worry about filing the tax return.

[solomon]

But he insist on leaving it as a loss this year and make a profit next year.

What do you think of this?

Not having more information it is hard to say. Nevertheless, based on that statement (and 5 years of losses) it strikes me of someone trying to reduce taxes from the W-2 income - smells fishy.

If this were a type of business that required many years to make a profit that might be different. Sounds like a 5213 should have been filed three or four years ago.

You should review the criteria in §1.183-2 to determine if a business really exists.

[erchess]

Original Post

mentioned if I understood it the possibility of a Sch C omitting some of the expenses so as to show a profit. I just want to say that this is the one course of action that is clearly NOT open to you. It would technically constitute tax fraud although I doubt that angle would be actively pursued unless for some reason such as EIC the action increased refund or decreased balance due for the year.

I agree with those who said that if he would have a gain large enough to make sense of his putting in the time except for depreciation and vehicle expenses then you are probably ok although as Solomon pointed out TTB has a great section on factors pointing to and against the existence of a profit motive. If I felt that his position with respect to that was dicey I would have him sign an engagement letter specifying that I thought it was open to question and while you would help him for your customary fees you cannot guarantee that the finding would not go against him and cost him significant money. Of course if his position is beyond dicey then you have to put your foot down. As I understand it we are supposed to believe that what we do will have at least an even chance of holding up under examination.

[SueBaby]

Not having more information it is hard to say. Nevertheless, based on that statement (and 5 years of losses) it strikes me of someone trying to reduce taxes from the W-2 income - smells fishy.

If this were a type of business that required many years to make a profit that might be different. Sounds like a 5213 should have been filed three or four years ago.

You should review the criteria in §1.183-2 to determine if a business really exists.

He has a hugh depreciation more than his income. This is going to be his retirement business in 2 years when he retires. His wife works as a nurse.

Don't know how to make a profit with all that depreciation. So now what????? Thanks for ANY advice. Called IRS and said if make a loss this year it will be a red flag and possible audit AND it will be considered as a hobby. That is not good since this will be his only business later on.

[solomon]

He has a hugh depreciation more than his income. This is going to be his retirement business in 2 years when he retires. His wife works as a nurse.

Don't know how to make a profit with all that depreciation. So now what????? Thanks for ANY advice. Called IRS and said if make a loss this year it will be a red flag and possible audit AND it will be considered as a hobby. That is not good since this will be his only business later on.

What is the gross income, total depreciation, and net profit.

[SueBaby]

What is the gross income, total depreciation, and net profit.

GROSS= $76,878

total depreciation= 6,344 on SCH C (this is his big welding equipment and everything he bought for his business)

his income for SCH C is only 2250

which his expenses , along with depreciation on the SCH C makes it over $8,000 LOSS sooooo how can I make a profit with this???

I can't seem to put this puzzle together right I know I am making harder than it looks; but thanks for any help. Less than 2 weeks to go and I have hard ones now.

[gman]

I have seen many clients have continous losses on Sch C,F, & E. They never seem to get audited. I give them information each year about the chance of an audit, however some of them have had losses for 15-20 years--- and No audits. I need to keep my clients and Know they can go across town to a preparer who will take all the deductions they list.

[BHoffman]

GROSS= $76,878

total depreciation= 6,344 on SCH C (this is his big welding equipment and everything he bought for his business)

his income for SCH C is only 2250

which his expenses , along with depreciation on the SCH C makes it over $8,000 LOSS sooooo how can I make a profit with this???

I can't seem to put this puzzle together right I know I am making harder than it looks; but thanks for any help. Less than 2 weeks to go and I have hard ones now.

Do you have any leeway for cell phone expense, office expense, home office, storage, mileage, etc? It usually is harder to find expenses than to find income

Can you take another look at the salvage value on the fixed assets?

[Gretel]

Called IRS and said if make a loss this year it will be a red flag and possible audit AND it will be considered as a hobby. That is not good since this will be his only business later on.

This advise is plain stupid. Showing a loss for years in a row might be an indication of not running a biz but the other factors need to be considered as well. I have a restaurant biz that shows losses since forever, with one year of a little bit of profit in between. They got audited three years ago and auditor even found some more deductions for them.

[Edsel]

Is time on your side?

What kind of track record does the Total Revenue have over this five-year period? Is it growing? That's a positive argument.

If you're taking accelerated depreciation on his equipment, this will eventually peter out and depreciation expense will be minimal. If he is continuing to invest in expensive heavy equipment year after year to "grow" his business, then his business is in fact probably growing, and if the records don't show this, he's probably hiding some revenue.

Although you are not expected to conduct an audit, you are responsible for obvious judgements based on a preponderance of the situation.

As Luis Mopeo's favorite expression, this is dictated by "facts and circumstances."

Hard to find a situation that isn't.

[BHoffman]

This advise is plain stupid. Showing a loss for years in a row might be an indication of not running a biz but the other factors need to be considered as well. I have a restaurant biz that shows losses since forever, with one year of a little bit of profit in between. They got audited three years ago and auditor even found some more deductions for them.

Agree completely with Gretel. I also have Sch C businesses that show losses every year. They are definitely pursuing profit, but they just don't make any money or they are growing, as Edsel said, and writing off heavy equipment purchases via Sec 179.

I would file the return as is and cross the bridge if it comes to that. Sales of over $70k probably precludes this activity from being considered a hobby.