Daycare Provider Winding Down Her Business

[RWG1950]

My taxpayer (MFJ) has had a career operating a small daycare business out of her home. Now in her mid-seventies, she is winding it down.
In past years she would have $60-$70-K in gross "C" income & we would look for every possible deduction.
This year she only gave me about $5,700 in gross daycare income. Her 2024 daycare expenses (including the 8829) exceed her income.
She doesn't want to show a loss and carry it forward as she may be out of the business in a year or two due to health issues.
Was wondering how other preparers would handle this. Use just enough expenses to zero out the SE income?

[rbynaker]

Winding-down expenses are not uncommon. I think you still ask questions. If she's not making as much money then the space/hours may be lower which would reduce the 8829 allocation. I don't let "what the client wants" dictate how to accurately prepare a tax return. If the expenses are ordinary and necessary they get deducted. You should go through the hobby vs. business criteria with her in case anything jumps out, but with a long history of profit the burden of proof is still on the IRS for this year.

Rick

[TaxGuyBill]

Her 2024 daycare expenses (including the 8829) exceed her income.

I agree with Rick's comments.

Why doesn't she want to show a loss?

Would there really be a deductible loss? The expenses on the 8829 are usually limited to income anyway, so that wouldn't give her a loss (unless she itemizes, in which case mortgage interest and real estate taxes could give a loss).

[rbynaker]

I guess you could use the simplified method for business use of the home which would likely show a lower deduction. I'm not sure I'd recommend it but it might be worth a look.

[RWG1950]

Her schedule "C" (without regard to the 8829) has expenses for standard business mileage, daycare liability ins,
standard meal expense as well as arts & crafts and other entertainment items for the children in her care
that result in a loss of $1,250 or so. This situation will likely continue in the last year or 2 of her daycare career.
Past two years were similar but with a little more gross income resulting in break even or a $238 net "C".
She obviously is no longer in this for the money. My concern with showing losses is business vs hobby.

[rbynaker]

No one factor is determinative but are there expenses she can scale back on now that she's not making as much? One of the factors is "There is a change to methods of operations to improve profitability." I would be she still checks a lot of these boxes:

https://www.irs.gov/newsroom/heres-how-to-tell-the-difference-between-a-hobby-and-a-business-for-tax-purposes

Also, if you know this is the last year or two, put a winding down plan in place (maybe there are a handful of kids that will age-out in a couple years and she wanted to provide continuity of care). Even with some losses if she's still behaving like a business it will be difficult for the IRS to say it's a hobby. On the flip side, is the revenue all from family members? That may suggest it's not for profit.