Taking A Loss On Taxes. ..is This Crazy?

Business By ohsugarsweets Updated 2 Jan 2014 , 2:48pm by loriemoms

ohsugarsweets Posted 2 Jan 2014 , 4:02am
post #1 of 11

I've had my home business up and running for a little less than 2 years. It has been a very busy year. This year I bought A LOT of equipment and supplies. I'll be taking an $11,000 loss on my business,  not including $5,900 in mechanic work on the truck I use for deliveries (because a mechanic screwed up on the work he did, so another mechanic had to fix it. This is currently waiting for a court hearing) . Is this a ridiculous amount of expense/loss on a new business?  I'm prepping for my taxes and it just seems crazy to me when I look at the bottom line.

10 replies
jason_kraft Posted 2 Jan 2014 , 4:31am
post #2 of 11

AWhat was your gross income? How about your net income last year? Are you depreciating the equipment you bought? Is the truck used exclusively for your business?

BeesKnees578 Posted 2 Jan 2014 , 4:34am
post #3 of 11

Isn't it assumed that a business will experience loss in the first and second...maybe even third year?

 

Hopefully so they won't red-flag you.

 

I will be doing mine for the first time in two years (took a break for baby)...not looking forward to it at all.  I didn't do much biz and much of it was donations.  If I hadn't registered my biz name with the state, I don't know it would even be worth doing them as they won't add up to more than being a hobby.  

 

We will see....good luck!

PumpkinTart Posted 2 Jan 2014 , 4:39am
post #4 of 11

Most businesses have losses in their first year or two because of the amount of equipment & other startup expenses they incur.  To know whether it's "ridiculous" depends on how much revenue you generated in comparison to the loss.  Also, if you purchased a lot of equipment (depreciable equipment), you may not want to take it all this year.  You might want to use regular depreciation and spread the costs over the future years of your business revenue or you'll be taxed on higher profits in the future.

 

If the truck you use for your deliveries is also your personal vehicle, you can't write off all of the repair costs against your business.  You'll have to apply business use percentage to the repair cost and only write off this amount (i.e. used 40% for business / 60% personal, take total repair cost x 40% as your write off). 

 

If you have other income that will be offset by your business losses, your taxable income will be reduced this year.  If you don't have any other income, you won't be able to benefit from your business losses, anyway, and will need to carry them forward to future years.  

 

It's important that you seek the advice of a tax professional or CPA that can help you consider not just the impact of the decision on your taxes this year but for the next few years as well.  

PumpkinTart Posted 2 Jan 2014 , 4:44am
post #5 of 11

Quote:

Originally Posted by BeesKnees578 
 

Isn't it assumed that a business will experience loss in the first and second...maybe even third year?

 

Hopefully so they won't red-flag you.

 

Absolutely NOT!!!  My business and several of my clients' were profitable immediately.  While "most" businesses do have losses, "most" businesses also have large equipment purchases, rent, payroll, research & development, etc., that lead to those losses.  Other businesses, especially a lot of home based food businesses have such low expenses they can be quite profitable.  Every business is unique and there is no assumption, especially when you are talking about taxation, that a business won't make a profit for several years.

 

Actually, quite the opposite.  If you claim business losses for three straight years, the IRS and/or state taxing authority might declare that you don't have a business at all and that it's just a hobby which will result in disallowing most or all of the losses you claimed in prior years and a hefty tax bill.

ohsugarsweets Posted 2 Jan 2014 , 4:46am
post #6 of 11

AMy husband works also. That will give us income. The truck is 100% for business. This year, I have to cut off the business and put it on hold due to family and medical reasons :( but I'm going to hold on to all of my equipment. I can use it later when I can start back up again.

spapula Posted 2 Jan 2014 , 5:38am
post #7 of 11

I use to take a loss on my business when I was married.  I kept every receipt and took ever possible deduction.  I could have backed up every deduction if I was audited.  Then I got divorced.  As a single parent, there wasn't any advantage for me to lower or eliminate my income.  If I got my income down to zero I would pay zero taxes.  Great right?  Wrong.  I am better off only reducing my income to $12,000 to $15,000 a year.  If I make $12,000 I owe $1695 in self employment taxes.  This would seem bad but it's not.  A $12,000 income also qualifies me for $5018 in EIC and $1222 for the additional child credit.  Therefore, I actually get a refund of $4545.  That is great- for me anyways.  

 

Make sure you are careful about start up costs.  We use to use an accountant when I was married.  They insisted that most start up costs had to be spread over like 5 years.  Something about only items that are used up or consumed can be counted 100% off the first year.

 

Depending on how much your car expenses are it may be better to use the mileage rate vs the actual cost.  It depends on how much traveling you do for your business.

Norasmom Posted 2 Jan 2014 , 5:38am
post #8 of 11

On a large business, $11,000 is not that much.   I spent quite a bit on stuff just having cake decorating as a hobby, which is why I decided to start charging and get a legal business.  It all adds up!  I do suggest you put together a business plan for next year that will make up for the loss.   Sorry about your truck. :-( 

 

I don't have a huge business, so I am only speaking my opinion.  I get a lot of requests but I turn many of them down because I reach a point where I want a clean kitchen for a few weeks, so I take  a "cake break."

PumpkinTart Posted 2 Jan 2014 , 5:39am
post #9 of 11

Unfortunately, it's not quite that easy.  You really need to consult a CPA or tax professional.  Typically, you cannot fully depreciate equipment one year, then stop using it the next year and/or close down your business without recapturing the depreciation (i.e. adding back taxable income) the following year.

 

The IRS has very strict rules on business use and claiming depreciation expenses.  If you claim all of your business losses, including depreciable property this year, and then stop operating your business, you basically claimed a tax benefit (depreciation) in one year that should have been spread over 3-7 years (depending on the asset class.  You could be setting yourself up for a very large tax bill in future years, including penalties and interest for failing to recapture.

 

Also, if your business is legally registered with either the Federal government (do you have an EIN number) and state, you need to be careful about notifying them that you are temporarily or permanently closing your business.  You can't just let your business lapse and pick back up at some point in the future.

PumpkinTart Posted 2 Jan 2014 , 5:45am
post #10 of 11

Quote:

Originally Posted by spapula 
 

I use to take a loss on my business when I was married.  I kept every receipt and took ever possible deduction.  I could have backed up every deduction if I was audited.  Then I got divorced.  As a single parent, there wasn't any advantage for me to lower or eliminate my income.  If I got my income down to zero I would pay zero taxes.  Great right?  Wrong.  I am better off only reducing my income to $12,000 to $15,000 a year.  If I make $12,000 I owe $1695 in self employment taxes.  This would seem bad but it's not.  A $12,000 income also qualifies me for $5018 in EIC and $1222 for the additional child credit.  Therefore, I actually get a refund of $4545.  That is great- for me anyways.  

 

 

I hate to tell you this but this is absolutely, without a doubt, tax fraud.  The IRS has dramatically increased the tax returns it audits that are claiming the EIC because of rampant fraud and if you are audited, you will be found guilty and banned from receiving the EIC going forward.

 

You are required to claim ALL of your income and ALL of your expenses.  You cannot withhold some of your expenses in order to exploit the EIC. If you are using a paid tax preparer, he/she should be educating you about the requirement to claim all expenses because the preparer is responsible for meeting due diligence requirements on all EIC returns.

loriemoms Posted 2 Jan 2014 , 2:48pm
post #11 of 11

I highly suggest you sit down with your CPA.  Depreciation is very complicated these days, and you may end up saving some money.  Taxes are not something you want to play with !

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