Schedule "C" Daycare Loss

[RWG1950]

I have an older customer (MFJ) now on social security, that has operated a daycare business out her home for decades, by herself - no employees.
Years ago, her gross income from this business would range from $60 to $75-K & I made it a point to take every possible deduction available to her.
She is now semi-retired and only reports a gross of about $10-K or so from this business and will likely be fully retired from daycare within the next year or two.
Using 8829 expenses & certain other direct daycare expenses brings her 2023 net "C" down to almost $0, but she has certain other small depreciable
items of direct use in her daycare business on her depreciation sheet that, if used, would cause her "C" to show a small net loss.
She tells me she doesn't want to show a loss. Is it OK to just ignore certain expenses so her "C" shows $0 or just a few dollars of profit ?
I know depreciation is "allowed or allowable" regarding cost basis but this is unlikely (it seems to me) to present a problem for her given her situation.
Thanks for comments.

[Rapid Robert]

In short, unless she is trying to generate "fake" income for purposes of EIC or other refundable credits, I don't see a problem with it. You don't give her age, but probably too old for EIC anyway.

Also, I think Form 8829 OIH deductions are not allowed to bring net profit below zero, but not sure if it is different for daycare.

[New York Enrolled Agent]

Is it OK to just ignore certain expenses so her "C" shows $0 or just a few dollars of profit ?
I don't see a problem with it.

Read Rev Ruling 56-407 and an update in CCA 200022051

[Rapid Robert]

I think NYEA is trying to say yes, there is a problem. However, he does not address the issue of whether OIH deductions can generate net loss on a Schedule C.

The important question really is, "She tells me she doesn't want to show a loss" - WHY? what's the issue?

I finally found the rev rul in a 1,512 page PDF file, couldn't find the CCA.

The issue for me, and for many preparers I'd wager, is whether or not the SE income is being used in any way to avoid secondary effects. I suppose the IRS wouldn't want to come up with a list, but we have:

• -Soc Sec. benefits earned
• -IRMAA adjustment if already on Medicare
• -EIC and other refundable credits
• -financial aid based on tax return numbers
• -AGI effect on various phaseouts/thresholds (remember we're talking about Raising AGI, not lowering it)

Well, if the net SE earnings are less than $400, then no Soc. Sec. benefits are at issue (also if the current year is not one of the taxpayer's 35 top earning years). The other items need to be looked at carefully, so much depends on AGI and how much higher it might be if all "allowed" deductions were taken. But if the desired result is a net profit of $200 instead of a net loss of $200, it's hard to see how that could make much of an impact on a "semi-retired" taxpayer on Soc. Sec (granted we don't know anything about the spouse).

I'd be curious to see what NYEA has to say about how the IRS would prove that an expense was deductible if taxpayer says it was not. Mileage? Sorry, I don't have a written log. Food purchased? Oh, that was for personal consumption, not for the daycare kids. Area of the house used for daycare? Oh, I made that smaller than it used to be.

I had a client this year trying to get a late life career as a speaker off the ground. Had a loss 2 out of previous 4 years, and not really making much progress toward making a living at it. For 2022, among other expenses, said she spent $40K on some coaching or training that included travel or something like that, which would have generated a huge loss on Schedule C. I questioned whether it was a legitimate business expense. In the end she agreed it was not, and we did not include it.

So is it true that if audited, the IRS would claim that she omitted a $40K deduction on her Schedule C and force her to report it and receive a refund? Would there be a penalty (for perjury, I guess?) If so, it would be good to know (a court case based on a similar set of facts would be a helpful reference.)

Here, for reference, is the kind of thing the Rev Rul seems to be concerned about (other than farmers).

Section 208 of the Social Security Act, as amended, provides penalties
for a person who makes any false statement or representation in
connection with any matter arising under the Self-Employment Contributions
Act of 1954, for the purpose of obtaining or increasing benefits
under the Social Security Act.

I take that statement in the Rev Rul as evidence that the IRS is mostly concerned about "obtaining or increasing" benefits, not merely an abstract concept of an inflexible reporting regime for its own sake. After all they added the "for the purpose of" qualification, they didn't have to.