"Should I estimate my tax deductions for my new biz, or just forget it?"

October 2, 2010 11:39 AM

I started a side business in 2009 and operated at a loss. I did a terrible job of record-keeping. Should I submit deductions, or just forget it?

I gotta file by 10/15 (I opted for an extension).

In 2009, I started a small biz while working full-time. The revenue I made wasn't enough to cover my expenses. I didn't keep track of my spending and earnings very well. Since then, I quit my job, established an LLC, and my business is profitable.

But I still need to submit 2009 taxes...

Even though I wasn't organized in 2009, I know I operated at a loss. In other words, if I had properly kept track of things, I should be getting back some of the taxes I paid from my $35,000/year job.

Is it worth it for me to cite deductions and risk an audit? I will have to do quite a bit of estimating. Or should I just disregard that info and just file my W-2 for my job?

With deductions, I should get back a nice check. Without, I'll just about break even. I realize the best case scenario is one in which I was meticulous about record-keeping, but I wasn't, and now I'm in a pickle.

posted by sorrenn to Work & Money (7 answers total)

I generally find in these things that I can get a pretty good handle on my per-business expenses with an hour-long review of credit card and bank statements and a highlighter.
posted by RJ Reynolds at 11:40 AM on October 2, 2010

You should read IRS rule on hobby loss deduction first: http://www.irs.gov/newsroom/article/0,,id=169490,00.html

IANAA (accountant), but your business must be operated at a profit for 3 of the last 5 years to be considered a for-profit business and thus entitled to loss-deduction. On top of that, you are supposed to keep good track record of your business expenses, especially when you plan to use that for deduction.
posted by curiousZ at 12:00 PM on October 2, 2010 [1 favorite]

Response by poster: Thank you for the link. The text says that the IRS presumes that an activity is for profit if it's operated at a profit for 3 of the last 5 years, but it doesn't say "must be operated." Can anyone clarify this? Am I unable to claim deductions unless I'm in year 3? That doesn't seem right.
posted by sorrenn at 12:53 PM on October 2, 2010

See this article for more on the hobby loss rule, along with this circular on IRC 183. As I understand it, there's a presumption that an activity is for profit under the 3/5 rule, but activities can also be for profit if they are conducted with "the honest belief that the business will sometime in the future become profitable."

In other words, you can't deduct the cost of your boat because you charged your buddies a few bucks for a ride. That's a hobby and not a business. Setting up shop on the pier, with appropriate business licenses, advertising regularly scheduled cruises, hiring employees, etc... is a business.

If most people wouldn't reasonably call your small business a hobby-like activity, I wouldn't worry too much about this.

I, also, ANAA.
posted by zachlipton at 1:34 PM on October 2, 2010

Schedule Cs are filed with losses all the time, especially in the early years of a business. You're overthinking this. Your worst case scenario is that you end up paying the difference and maybe some interest that you would save by filing. Audits sound scary but they're really more about catching fudgers and fakers than people who legitimately started businesses that didn't (at least at first) make money.

Besides, my dad had a little consulting business that filed a loss for almost 15 straight years and was never audited or even challenged by letter once. There are not as many people doing the auditing as there used to be and they really try to be efficient about who they point these resources at.

Since your business is now profitable, it is my professional opinion as a sometime tax preparer that you have little to worry about. Your earnest concern is really quite sweet to see, given the scam artists who want to deduct HOPE credits for their grandma's cousin out there.
posted by dhartung at 4:35 PM on October 2, 2010

Response by poster: Thank you -- that makes me feel a lot better :)

I realize I did a bad thing by not accurately keeping track of things, and I'm in the process of mending my ways.
posted by sorrenn at 5:13 PM on October 2, 2010

Try this site: June Walker, Tax Advice for Indies

Remarkable common sense.
posted by micawber at 7:24 PM on October 2, 2010