My client (1040A , 1- w2 $75K w/ Sched C)is concerned that he's been showing an NOL for the past five years averaging 5k in losses. He claims to be reporting everything (loss&deducts) on his Sched C and has support. He's concerned that it may trigger an audit and cringes on just the thought that it may trigger an audit. Any suggestions for my client?
He's had 5 years of Sch C losses sufficiently large to consume $75k of wage income and generate an NOL over and above that? What's he living off of?
Also, how is he filing a 1040A? There's no Sch C allowed for an A.
Phoebe - I assume he just means the schedule C is showing losses ------------ but assuming has got me in trouble before. I'm not sure about the 1040A thing though.
What kind of business is the schedule C? If he has a W-2 for $75k it sounds like he already has full time job ------ does he really have a business or is it in fact a hobby?
TX Controller------A question regarding the Schedule C and the loss is how much Depreciation is included in the Schedule C If there is a profit before Depreciation and Amortization?? Let us know
I was assuming the same thing as IRMN about those being Schedule C losses.
I can believe though that someone can make decent money at a full time job and also have a side business. I know I didn't prepare over 300 tax returns as a hobby last year.
Correction, he files a 1040. When he itemizes he receives an average of 5k from his income tax refund. That's not including his secondary part time job (DJing) he adds on his Sched C.
I have a feeling you don't mean 1040A with Sch C and NOL's. I have a feeling you mean a 1040 with a Sch A and a Sch C that shows a 5K loss every year? Am I close? If so, what is the Sch C business?
Section 179 coupled w/ vehicle expenses drives him into the red. I think it's immaterial posting the mula amount.
ArchieLeach------ YOU ARE CORRECT SIR! He's a DJ and travels quit extensively. Who knows, maybe he has a 3rd business as a male greasy stripper!
Can anyone of you bright informative contributors just answer the question? geesh!
What do you mean by he receives an average of 5k from his income tax refund?
How about not taking as much 179, not using the 50% bonus depreciation, changing to straight line deprecation or a combination of the three to put him just in the black?
Before you get snippy with us, 1) do research. 2) realize that we are volunteers. 3) Recognize that we ask additional questions to provide as accurate answers as possible. 4) Do not insult us and expect an answer.
179 should never be taken to increase a loss, but only up to the amount of gain. That said, have you looked at the rules that the IRS considers to be hobby losses vs. profit motive? This is important. What about his deductions? Are the all round number? Are his mileage numbers round also? Did he keep a log? Can he really substantiate the business use of the items that you're taking 179 on? There are a lot of questions here which must be answered before you can even begin to prepare an accurate return and/or advise your client.
TXcontroller - These people may need more information to give you an accurate answer. You should answer their questions as clear as possible, not with I think its immaterial posting mula or just answer the question. Nobody knows your exact question.
So let me ask the question and you tell me if this is the correct question. I have a client who has averaged losses of 5K each year for the last 5 years on his DJ Schedule C business. These losses were mostly due to Sec. 179 deductions and mileage expense. Should he be worried about a possible audit because of yearly losses and worse yet can the IRS consider him to be a hobby and disallow losses? He can substantiate these expenses with receipts or checks or log books. He has a separate full-time job making 75K per year.
What a smart bunch of bull!
Txcontroller-that is the reason I asked you the additional question and now if you ant to read I feel that if he had a Profit BEFORE Depreciation and or Section 179 it would be allowable and stand up if the Depr and Section 179 areVALID and this is where you as the preparer need to examine th facts and circumstances and use due diligence. We are attempting to helo you
Phoebe's 1st post missed the point that the losses are $25,000.........Archie picked up the thread with the correct starting equation - 5 years with $5K Net Operating Loss, turning clients $75K salary into $70K taxable.
Is he an audit target due to the NOL? To continue deducting losses he needs to look first at the true potential for earnings - can he project a track that says potential future earnings are worth the initial period of losses? Entertainments, including horse races fit the bill - you say he's a DJ.......there are other public benefits like bringing income into the neighborhood......... IS there actual cash money rolling in? Are other people covering the same kind of expenses in pursuit of income in the same industry?
Your client's audit potential does not come from the losses themselves - are they sufficiently explained in the tax return? ......So that anyone pulling out the tax return can see the viability of the enterprise. They will toss it right back. Unless it looks like he's having way too much fun and not bringing in earnings.
Audit comes first from errors - the errors spit the return out for handling. Next is a percentage for random sampling, and also the dreaded taxpayer compliance review, where every single box is verified. Sprinkle on some spiteful follow-ups where people have reported or complained, and following up the business associates of dicy business ventures that didn't sustain an audit......that's who is getting audited - various industries get targeted compliance reviews, then they'll target business segments - so look at his own industry for eventual viability to sustain the losses - and he's in business.
And I agree with mojocpa that taking less steep depreciation over time does have some benefits/ balanced by the availability of current money......... which you don't want an auditor taking back - so look for dis-allowable areas in the tax form and be sure the records are solid.
I'll stand by my answer. Does he show profit motive? Does he have a written business plan. You of all people should know what the IRS says about how many years of losses they will look at. It's not just about losses, but about incorrectly taking 179 deductions.
How the heck can he explain losses year after year if there is no profit motive? The IRS has stated quite clearly that they are going to be looking at Sch. C filers to determine if they are overstating losses that should be claimed as hobbies.
Since you don't like questions but like answers, here is an easy one. If he wants to sleep at night -------------------------- get out of the business. Putting my smell test to work - if he is "cringing" at just the thought of an audit, he either is playing some games with income and/or expenses or he knows he just has a weekend hobby going for him.
And Also you as the preparer are required to make sure that if your name is on the return it passes the "Smell" Test as Archie and IRMN have stated
