Need 2nd opinion

[rkhan71]

Client started a window repair and tinting business and closed business in the same year (2011) - duration of 3 months. It was not considered a filing in 2011 tax year but clients wants to see now if doable. I am concerned about hobby loss rules/profit motive even though they had a profit motive intention, and the 'C' potentially creating an audit target because of the lack of substance if you will, if any. Again, there intention was to make profits; just did not work out. Can someone or others please shed some thoughts on how we/I would/should approach this - hobby and forget or... Or am I missing something way off? Would greatky it apreciate it; brain not working properly today.

Thanks for your help in advance.

[DaveinTexas]

Hobby Loss

Client started a window repair and tinting business and closed business in the same year (2011) - duration of 3 months. It was not considered a filing in 2011 tax year but clients wants to see now if doable. I am concerned about hobby loss rules/profit motive even though they had a profit motive intention, and the 'C' potentially creating an audit target because of the lack of substance if you will, if any. Again, there intention was to make profits; just did not work out. Can someone or others please shed some thoughts on how we/I would/should approach this - hobby and forget or... Or am I missing something way off? Would greatky it apreciate it; brain not working properly today.

Thanks for your help in advance.

audits are not common, at least in our neck of the woods. BUT, if an amended return is filed to report a loss on a failed business, this would put your client at a greater risk of getting flagged for audit (in my opinion). Of course, it would depend on the amount of the loss; obviously a large loss would draw more attention.

I have no qualms with reporting a business loss for a business failure. I would advise the client to include in his business records some kind of documentation that proves his intent to make this a profitable venture. Time spent researching the business, capital invested, past experience with this type of business, other efforts to prove to any interested third parties that this was not just a black hole to throw money at. Were there assets purchased such as inventory/equipment with residual or appreciating value, at the time of operating the business did the client have a main job that provided most of his earnings? Was there an attempt to salvage the business in anyway or improve the marketability of the service? Advertising/Marketing?

If the client is serious with giving it a go, he must know what his risks are and what steps he needs to take if an audit rears it's ugly head. It may be more work to the client than would be a benefit. I don't like to scare clients but I wouldn't be doing my job if I didn't warn them of the risks.

[Snaggletooth]

Go for It

There's really nothing to lose other than the effort to file an amended return. Like Lone Star Dave says, it will be looked at in greater detail than had it been originally reported, but the worst that can happen is a denial of the loss (unless other problems may exist on the original return).

A window cleaning business that fails is not a hobby. It's not like driving a dirt-track race car or raising brood horses that are notorious for never showing a profit, so I would say he should be able to deduct the loss.

[taxea]

prepare an amended return, charge the client for it and let him decide whether to file it.

[AZ-Tax]

I have had a few of these over the years

I have had a few of these over the years. For some reason the taxpayer thought since they never showed a profit, they cannot deduct their bus related expense. As long as the intent was there, paper trail of bus exps, mileage etc. and the main qualifier, the taxpayer didn't open and close previous businesses and claim losses numerous times in previous tax years.

[Roberts]

A window cleaning business that fails is not a hobby.

YEP

Besides my mother-in-law, I can't think of anyone that enjoys cleaning windows. If work was actually performed and documented, I can't imagine the IRS would consider window repair and tinting to be a hobby. Now if all the customers are friends and family who paid far below market rates, we have an issue.

[FEDUKE404]

Otoh

Well, he could always do some summer-time painting (or was it windows??) and not consider it a "business" in the first place!

[Black Bart]

Yeah -- think I'd probably give it a shot, but...

with conditions (1) wait 'til closer to end of tax season in case it got kicked back right away (2) make sure they understand audit risk is higher on amended returns AND that there will be an additional fee if it happens (3) maybe send some xeroxed documentation of larger items in with it to forestall audit.

Can't see anything wrong as long as he's got the paper to back it up. Just explain on 1040X that: "Taxpayer was unaware that he could claim this loss..." -- that usually makes sense and rings true to IRS.

[rkhan71]

Thanks...

everyone for the comments. I appreciate it as usual. Without you guys, having no one else in office to run this by, I do not know what I would do.