EIC and Sch C

[Possi]

My client has wages of about 6100 and is self employed. She qualifies for EIC.
Problem is this:
She has gone into debt with this at home business and her net loss from the Sch C is 3000.
This has bombed her refund. Is there anything I can do?
Thanks!

[Chief]

EIC and Sch C

IRS looks critically at self-employe income and EIC. Tell your client to start making some money or change her self-employment activity to one more lucrative.

[Possi]

Self employed

I have lots of self-employed clients, and we all agree; we love money. She is giving it all she has and is really trying to make a go of it.
Thanks~

[jainen]

call it a hobby

>>Is there anything I can do<<

You could call it a hobby and not take the loss.

[Possi]

gracias!

Why didn't I think of that?
Thanks~

[Bees Knees]

According to IRS Letter Ruling 200022051, self employed taxpayers that do not claim all of their deductions for the purpose of increasing EIC can have their EIC disallowed for ten years under Section 32(k).

If the taxpayer is not a hobby but a business, but the taxpayer claims the business is a hobby for the purpose of increasing EIC, the result would be no different than not claiming all of the deductions on Schedule C for the purpose of increasing EIC.

[Matt Sova]

Thought

File the 8832 under the Rev Proc listed in the instructions for late filing and have this taxed as a C-Corp.

Oh, wait, then you'd have to prepare a corp return and charge her for it resulting in you getting the money she would get from the EIC and the loss stays with the corp until it can be used to offset gains.....

Tell her to start making money at this.

[Unregistered]

I agree with Bees. There are specific rules for deciding whether an activity is a business or a hobby. You cannot make the decision based on which designation would cause a better outcome for the client. Recommendation of such a course of action to your client would be highly unethical.

[Possi]

Oh, THAT'S why...

THAT'S why I didn't think of that!
Thanks for the discussion. I learn something new everytime I question myself. And I don't feel like anyone is blitzing me out on this message board.


~poss

[Unregistered]

Where does it say hobby income is considered earned for EIC purposes?

[Bees Knees]

Hobby income is not earned income for purposes of EIC. Who said it was?

[jainen]

I'll say it is

I'm not doing much this afternoon, looking for a little hostile action. I'll say it is.

[Bees Knees]

Section 32(c)(2)(A)(ii) says it has to be subject to SE tax under Section 1402(a). Is hobby income subject to SE tax?

Not when you report income on line 21 of the 1040 and deductions on Schedule A.

[Possi]

holy cow!

Not only am I learning that hobby income is not income for EIC purposes, but I'm learning how to argue constructively!
I love this message board! And the books are wonderful, too.
~poss

[Bees Knees]

Now let me through another twist into this:

Hobby income where there is a net profit. Is that subject to SE tax and thus, increases EIC?

The hobby loss rules under section 183 are applicable to losses. The rule says no losses are allowed. But if there is a profit, then there is no loss. Thus, section 183 would be meaningless in a profit year.

So does that mean you get EIC if you report the hobby income on Schedule C in a profit year?