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    7 Replies Latest reply on Mar 13, 2008 5:34 PM by Lighthouse24

    Question regarding a business showing a profit...

    designer Tracker
      Hello. I know this might sound silly to the hard-core professionals out here, but in general- I was wondering if there are any rules or laws about having a side-business and not posting a profit after "x" amount of years? I guess more specifially, does the IRS frown on a business if they keep posting a loss and if the revenue is never greater than the expenses? They always say it takes a "few years" for a small business to get going. In the first year or two or three you have the start-up costs, operating expenses and initial investment into materials and supplies. The revenue a business pulls in at the beginning, just helps a person get out of the "red" per se. Now, all businesses are also facing a recession these days, especially if you are in a luxury type business, so that is another key factor playing into the equation. A business owner can't force customers to buy and twist their arms. Many small business owners are working other jobs and keeping the side-business going because they enjoy it very much and that is their dream to bridge into their side-business 100% some day. So, does anyone know if a business can keep going in its 4th year and possibly 5th year - - -or it is likely the IRS will have something to say about it and is anyone ever forced to stop and close their business because the revenue is never greater than the operating expenses? Thank you.
        • Re: Question regarding a business showing a profit...
          LUCKIEST Guide
          designer. Thanks for sharing so much info.
          HOWEVER, why is the business showing a loss and why do you want
          to keep operating a business that is losing money.
          That is what the IRS is going to ask you.
          They will also ask you if this is a HOBBY??
          If it is a hobby and not a business, they will not allow the loss.
          • Re: Question regarding a business showing a profit...
            dublincpa Scout

            The hobby loss rules are that if the business loses 3 of 5 years for most business or 5 of 7 years for some horse businesses and possibly some other ag activities, that it is just a hobby. There are different ways to look at a business like appreciation of assets and goodwill, but usually it's a cash flow perspective. Some industries are more prone to be viewed as hobbies too.


            The bottom line is that for the most part if the business is legitimate and treated like a business, the losses/deductions may be questioned, but not likely overturned. I have had auditors try to claim the hobby loss rules with the three of five years rule on real businesses where people just made a lot of bad business decisions. As soon as the conversation turns that way, I ask if they are as comfortable taking that stance in front of Appeals or the Tax Court as I am defending against it. I have yet to hear the question a second time on any audit outside of a horse business (and even that one was a valid business).


            If the only reason it's a business is for tax deductions, one will almost certainly lose. Every once in a while, I get someone who wants to play the games. I won't take them even if I could use the fees because I know that I am doing them no favor. If during the conversation, the strongest defense for a position is "Who is going to know?", that is the losing side of an audit waiting to happen.
            • Re: Question regarding a business showing a profit...
              designer Tracker
              Thanks, Dublin! I feel great comfort in your explanation and answer. If a person is trying to do the right thing and is giving 110% into a legitimate side-business and trying with all their might with the means and tools available to them and willing to stand before any judge in total confidence that it is a true business then I think my question is answered.
              • Re: Question regarding a business showing a profit...
                Lighthouse24 Ranger
                What dublincpa said . . . and I hope I can remember which thread that answer is in so I can refer the next person who asks the same question to it in the future (it wasn't silly, by the way -- you weren't the first to ask, and you sure won't be the last!).
                • Re: Question regarding a business showing a profit...
                  designer Tracker
                  Thanks, LUCKIEST! Good answer as well. Hobby or business? That is what is key and what were the true intentions of the business owner. Usually is becomes very apparent in the end. Thanks so much!