The IRS looks carefully at taxpayers who consistently show a loss from a business on their tax return to determine if they are really running a business. Many taxpayers are aware that you may be audited unless you show a profit in three of the last five years. That's really the gross test used to identify taxpayers who might not be conducting a legitimate business. There are specific criteria in the tax code that an auditor looks at when determining if you're really running a business and you and your tax preparer should consider all of them before claiming a loss on a business. They are -
1. Are you carrying on the activity in a businesslike manner, including the maintenance of complete and accurate books and records:
2. Does the time and effort you are putting into the business indicate an intention to make a profit?
3. Do you depend on income from the business for your livelihood?
4. Are the losses due to circumstances beyond your control?
5. Are losses normal in the start-up phase of this type of business?
6. Have you changed the way you operate the business in order to improve profitability?
7. Do you (or your advisors) have the knowledge or expertise to carry on the activity as a successful business?
8. Have you made a profit with a similar activity in the past?
9. Do you make a profit in some years?
10. Do you expect to make a profit in the future from the increased value of the assets you use in your business?
11. How significant is the element of personal pleasure or recreation in your business?
If you need any assistance in determining whether it's appropriate to claim your business loss, please contact Turner's Tax Service at 530-626-8551 or [email protected].
1. Are you carrying on the activity in a businesslike manner, including the maintenance of complete and accurate books and records:
2. Does the time and effort you are putting into the business indicate an intention to make a profit?
3. Do you depend on income from the business for your livelihood?
4. Are the losses due to circumstances beyond your control?
5. Are losses normal in the start-up phase of this type of business?
6. Have you changed the way you operate the business in order to improve profitability?
7. Do you (or your advisors) have the knowledge or expertise to carry on the activity as a successful business?
8. Have you made a profit with a similar activity in the past?
9. Do you make a profit in some years?
10. Do you expect to make a profit in the future from the increased value of the assets you use in your business?
11. How significant is the element of personal pleasure or recreation in your business?
If you need any assistance in determining whether it's appropriate to claim your business loss, please contact Turner's Tax Service at 530-626-8551 or [email protected].
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