I have a tax question

[Superfly]

OK -- I purchased things to start my own small business. I have since realized that the business will not be profitable, so I'm going to get out of it before I lose any more money.

I'm trying to sell what I bought to go into business, and am understanding that I am going to have to take a loss on the items. How does that work with my taxes?

Let me explain my income situation. My husband is a 100% disabled vet, so that money is not taxable. Only a portion of his Army retirement is taxable. I don't work currently, but my new job starts near the end of October.

Would the business loss be taken out of our tax liability? Would we be able to "recoup" the loss in our tax return next year?

I am trying to assuage my husband over the loss of money by telling him that it will be made up in our taxes as a business loss, and we'll get it back in the Spring, but I'm not certain, and want to be truthful with him about it.

 

[trfjr]

OK -- I purchased things to start my own small business. I have since realized that the business will not be profitable, so I'm going to get out of it before I lose any more money.

I'm trying to sell what I bought to go into business, and am understanding that I am going to have to take a loss on the items. How does that work with my taxes?

Let me explain my income situation. My husband is a 100% disabled vet, so that money is not taxable. Only a portion of his Army retirement is taxable. I don't work currently, but my new job starts near the end of October.

Would the business loss be taken out of our tax liability? Would we be able to "recoup" the loss in our tax return next year?

I am trying to assuage my husband over the loss of money by telling him that it will be made up in our taxes as a business loss, and we'll get it back in the Spring, but I'm not certain, and want to be truthful with him about it.

who did you vote for in 2012?
the IRS uses your political affiliation as a determining factor in their policies

 

[specklebang]

Luther will be your best source but here is what I think I know.

When you sell off the remains, you will create a short term capital loss. This can be used against short term capital gains and I think up to $3000 can be deducted from ordinary income.

 

[Superfly]

Well how will that work, though - see I'm not quite that well versed on income tax law. If the deduction is lower from income, does that mean I'll get it back in my return? That's all I'm worried about. I'm telling him that we'll get the loss back in Spring, but I don't know if we will or not, and I'd rather tell him the truth now, if I'm wrong.

 

[APACHERAT]

The four rules to being successful in a business adventure is location, location, location, and not have an incompetent President sitting in the White House who has no experience in the private sector.

 

[trfjr]

OK -- I purchased things to start my own small business. I have since realized that the business will not be profitable, so I'm going to get out of it before I lose any more money.

I'm trying to sell what I bought to go into business, and am understanding that I am going to have to take a loss on the items. How does that work with my taxes?

Let me explain my income situation. My husband is a 100% disabled vet, so that money is not taxable. Only a portion of his Army retirement is taxable. I don't work currently, but my new job starts near the end of October.

Would the business loss be taken out of our tax liability? Would we be able to "recoup" the loss in our tax return next year?

I am trying to assuage my husband over the loss of money by telling him that it will be made up in our taxes as a business loss, and we'll get it back in the Spring, but I'm not certain, and want to be truthful with him about it.

I've got some advice. claim you are a community organization and name it "progressive liberals in the pursuit of everything Obama" and claim tax except status you will be approved in a week with no investigation or further follow up

 

[vvx]

Luther will be your best source but here is what I think I know.

When you sell off the remains, you will create a short term capital loss. This can be used against short term capital gains and I think up to $3000 can be deducted from ordinary income.

Assuming this business actually was open for business rather than never getting off the ground, and the items sold at a loss were not inventory, the losses will probably be ordinary losses not capital losses. Depreciable property used in a trade or business. In which situation, the losses will offset the other income / no $3,000 limitation.

So no silly tax games required or IRS conspiracies needed about discrimination.

Form 4797, Sales of Business Property

Of course, the amount lost won't be replaced by an equal amount of tax benefit. If you have $1,000 of losses you could reduce taxable income by $1,000 but the actual tax savings are the taxes on the $1,000. If you're in the 25% tax bracket you'd get a $250 benefit for $1,000 of losses.

 

[MaggieD]

OK -- I purchased things to start my own small business. I have since realized that the business will not be profitable, so I'm going to get out of it before I lose any more money.

I'm trying to sell what I bought to go into business, and am understanding that I am going to have to take a loss on the items. How does that work with my taxes?

Let me explain my income situation. My husband is a 100% disabled vet, so that money is not taxable. Only a portion of his Army retirement is taxable. I don't work currently, but my new job starts near the end of October.

Would the business loss be taken out of our tax liability? Would we be able to "recoup" the loss in our tax return next year?

I am trying to assuage my husband over the loss of money by telling him that it will be made up in our taxes as a business loss, and we'll get it back in the Spring, but I'm not certain, and want to be truthful with him about it.

You won't get back what you spent. You'll get a write-off to your taxable income for what you lost. Example: Let's say you have a taxable income (before your business loss) of $20,000. And you end up losing $3,000 on all of the materials you bought. Your taxable income will be lessened by the $3,000 you lost. You do not get that money back on your taxes. You just pay less taxes. Hope that makes sense.

Well how will that work, though - see I'm not quite that well versed on income tax law. If the deduction is lower from income, does that mean I'll get it back in my return? That's all I'm worried about. I'm telling him that we'll get the loss back in Spring, but I don't know if we will or not, and I'd rather tell him the truth now, if I'm wrong.

Hope it makes sense to you from my answer and at least one other that you're wrong. Sorry.

 

[Superfly]

I don't understand - all the loss and I just have to eat it? I thought that losses could be written off.

I don't know how it will affect me because I don't really have much of an income to claim. Most of our income is non taxable.

 

[Lutherf]

OK -- I purchased things to start my own small business. I have since realized that the business will not be profitable, so I'm going to get out of it before I lose any more money.

I'm trying to sell what I bought to go into business, and am understanding that I am going to have to take a loss on the items. How does that work with my taxes?

Let me explain my income situation. My husband is a 100% disabled vet, so that money is not taxable. Only a portion of his Army retirement is taxable. I don't work currently, but my new job starts near the end of October.

Would the business loss be taken out of our tax liability? Would we be able to "recoup" the loss in our tax return next year?

I am trying to assuage my husband over the loss of money by telling him that it will be made up in our taxes as a business loss, and we'll get it back in the Spring, but I'm not certain, and want to be truthful with him about it.

I finished representing a client with a similar problem earlier this year and the first issue that the IRS will look at is whether or not this was ever a legitimate, for profit, business venture.

The straight dope is that the IRS generally looks at this kind of thing as a hobby instead of a business if it never got off the ground floor and as such any loss not allowed. However, [insert all pertinent disclaimers here] if you had some amount of sales you can probably get away with claiming some of the expenses as long as you don't go crazy. For example, if you had gross sales of $1,000 and expenses of $1,500 odds are that nobody will take a look at a $500 loss. If, on the other hand, you had $500 in sales and $25,000 in expenses you'll end up getting slammed.

If you want to drop me a PM with some specifics I can give you a little more insight.

 

[Lutherf]

I don't understand - all the loss and I just have to eat it? I thought that losses could be written off.

I don't know how it will affect me because I don't really have much of an income to claim. Most of our income is non taxable.

If most of your income ins non-taxable then it may not make a difference whether you show a loss or not. After all, nothin' from nothin' leaves nothin'.

 

[Superfly]

Well I will have an income by the end of the year.

I just thought that a business loss could be written off.

I'll PM you with details.

Thanks!

 

[vvx]

I don't understand - all the loss and I just have to eat it? I thought that losses could be written off.

I don't know how it will affect me because I don't really have much of an income to claim. Most of our income is non taxable.

Losses reduce taxable income, but it's not dollar for dollar benefit - nor would it make any sense if it were. If you make $10,000 in income, would you want to pay $10,000 in tax? That'd be stupid. You'd pay some percentage of that $10,000. Same thing with losses. When you invest in a business YOU are taking a risk. If you buy Apple stock and the stock drops tomorrow the government isn't going to make you whole, you took the risk.

 

[CaptainCourtesy]

Moderator's Warning:

And I am happy to report that Apacherat and trfjr have been thread banned for trying to make a person thread into a stupid partisan one. Please do not follow their lead and please stay on topic.

 

[obvious Child]

OK -- I purchased things to start my own small business. I have since realized that the business will not be profitable, so I'm going to get out of it before I lose any more money.

If Luther hasn't clarified the issue for you, we'll need to know the time frame here and your current revenue to expenses.

 

[Superfly]

Thanks, Cap'n. Appreciate it. I was going to say something to them, but realized they weren't worth the effort.

OC - He hasn't answered yet, but the time frame is very brief. Everything was purchased 2 weeks ago and without going into too much detail, the bottom has fallen out of my venture and I can no longer pursue it. There is no revenue at all. None. The expenses are minimal - around $2,000. Still more than I'd like to throw away, though.

 

[vvx]

Thanks, Cap'n. Appreciate it. I was going to say something to them, but realized they weren't worth the effort.

OC - He hasn't answered yet, but the time frame is very brief. Everything was purchased 2 weeks ago and without going into too much detail, the bottom has fallen out of my venture and I can no longer pursue it. There is no revenue at all. None. The expenses are minimal - around $2,000. Still more than I'd like to throw away, though.

So business never really was open then. Try this, from IRS Publication 535 page 3:

If your attempt to go into business is unsuccessful. If you are an individual and your
attempt to go into business is not successful,
the expenses you had in trying to establish
yourself in business fall into two categories.
1. The costs you had before making a deci*
sion to acquire or begin a specific busi*
ness. These costs are personal and non*
deductible. They include any costs
incurred during a general search for, or
preliminary investigation of, a business or
investment possibility.
2. The costs you had in your attempt to ac*
quire or begin a specific business. These
costs are capital expenses and you can
deduct them as a capital loss.
If you are a corporation and your attempt to
go into a new trade or business is not success*
ful, you may be able to deduct all investigatory
costs as a loss.
The costs of any assets acquired during
your unsuccessful attempt to go into business
are a part of your basis in the assets. You can*
not take a deduction for these costs. You will re*
cover the costs of these assets when you dis*
pose of them.

 

[PirateMk1]

Thanks, Cap'n. Appreciate it. I was going to say something to them, but realized they weren't worth the effort.

OC - He hasn't answered yet, but the time frame is very brief. Everything was purchased 2 weeks ago and without going into too much detail, the bottom has fallen out of my venture and I can no longer pursue it. There is no revenue at all. None. The expenses are minimal - around $2,000. Still more than I'd like to throw away, though.

From what Luther said, I would say you will not be able to take the loss. Sorry I don't have better news.

 

[Superfly]

That's OK - at least I'm getting out now before it gets worse LOL.

Thanks everyone.

 

[Gipper]

I finished representing a client with a similar problem earlier this year and the first issue that the IRS will look at is whether or not this was ever a legitimate, for profit, business venture.

The straight dope is that the IRS generally looks at this kind of thing as a hobby instead of a business if it never got off the ground floor and as such any loss not allowed. However, [insert all pertinent disclaimers here] if you had some amount of sales you can probably get away with claiming some of the expenses as long as you don't go crazy. For example, if you had gross sales of $1,000 and expenses of $1,500 odds are that nobody will take a look at a $500 loss. If, on the other hand, you had $500 in sales and $25,000 in expenses you'll end up getting slammed.

If you want to drop me a PM with some specifics I can give you a little more insight.

I've had clients who had Schedule C losses as well. Of my last few, one sold insurance on commission only and the money she received for services did not total expenses - gas, materials, and her own laptop that I wrote off as depreciated listed property (since it was needed for business, but she had before she started). She obviously sucked at her job. Anyway, she showed a loss of about a thousand dollars that deducted off her husband's military income and she never got flagged (that I'm aware of).

I had another who used to buy/salvage computers, fix them up, and resell them. However, since computers depreciate heavily and go obsolete quickly, sometimes if her inventory didn't turnover pretty damn quickly, she'd have to eat it. After some LCM adjustments and liquidations she still showed a loss that I carried over to her 1040 (of which she showed positive liabilities - gee, good thing these women are married). To my knowledge, she never got flagged either.

I'd probably like to know what all Superfly bought for the business. If she had items that are salvageable, obviously that changes things.

 

[soot]

Still more than I'd like to throw away, though.

And you shouldn't have to!!

By God, you should be able to foist those losses onto the American people!!!

From each according to his ability, to each according to his need!

 

[Lutherf]

I've had clients who had Schedule C losses as well. Of my last few, one sold insurance on commission only and the money she received for services did not total expenses - gas, materials, and her own laptop that I wrote off as depreciated listed property (since it was needed for business, but she had before she started). She obviously sucked at her job. Anyway, she showed a loss of about a thousand dollars that deducted off her husband's military income and she never got flagged (that I'm aware of).

I had another who used to buy/salvage computers, fix them up, and resell them. However, since computers depreciate heavily and go obsolete quickly, sometimes if her inventory didn't turnover pretty damn quickly, she'd have to eat it. After some LCM adjustments and liquidations she still showed a loss that I carried over to her 1040 (of which she showed positive liabilities - gee, good thing these women are married). To my knowledge, she never got flagged either.

I'd probably like to know what all Superfly bought for the business. If she had items that are salvageable, obviously that changes things.

If you show substantial gross receipts and end up with a loss that's one thing. If you show no gross receipts and a loss that's another.

The way I figure it is if your loss is somewhere around 10% or less of gross receipts you'll probably be OK as far having a "legitimate business purpose". The cases where you are pretty much guaranteed an audit is when you have substantial income from something other than the Sch C operation and a Sch C loss far in excess of "normal" business expectations.

For example, I have $100k in W-2 earnings and my Sch C Amway "business" shows a $20k loss on $3k gross receipts.

The other thing that will get you tagged is having a Sch C business with $5k profit on $250k gross receipts but itemized deductions of $40k. While an issue like that will probably result in a "no change" if the small profit (or loss) is due to depreciation don't expect that result if it's due to operations.

 

[sangha]

I say take the deduction. If you do, one of two things will happen

1) It will be allowed, in which case you save money

2) It is not allowed, in which case you'll have to pay the amount plus 10% "interest"

Just think of it as a loan that you might not have to pay back

 

[Gipper]

If you show substantial gross receipts and end up with a loss that's one thing. If you show no gross receipts and a loss that's another.

The way I figure it is if your loss is somewhere around 10% or less of gross receipts you'll probably be OK as far having a "legitimate business purpose". The cases where you are pretty much guaranteed an audit is when you have substantial income from something other than the Sch C operation and a Sch C loss far in excess of "normal" business expectations.

For example, I have $100k in W-2 earnings and my Sch C Amway "business" shows a $20k loss on $3k gross receipts.

The other thing that will get you tagged is having a Sch C business with $5k profit on $250k gross receipts but itemized deductions of $40k. While an issue like that will probably result in a "no change" if the small profit (or loss) is due to depreciation don't expect that result if it's due to operations.

The good side of that is that it will never be an issue to me. As I'm not a CPA (yet), I'm not ethically bound by anything, but I still have the right (and I have and would exercise it) if someone's obviously trying to pull a fast one. I'm not signing my name on anything that's obviously fraudulent.

Hell, I raked my uncle through the coals and asked him to explain a lot to me. He has a sole proprietorship LLC (easy enough - everything passes through). I did his 2553 for him and set it up as an S-corp with triple-A disbursements (for obvious reasons). However, he got flagged because apparently his base wage was a little on the absurd side. Didn't know that they had changed the rule for that recently. Since then, he's been writing off the strangest things. His is a consultant business, which means that he should have very few write-off expenses. This man will write off dinners with my aunt out on the town as business expenses. I swear...

 

[Lutherf]

The good side of that is that it will never be an issue to me. As I'm not a CPA (yet), I'm not ethically bound by anything, but I still have the right (and I have and would exercise it) if someone's obviously trying to pull a fast one. I'm not signing my name on anything that's obviously fraudulent.

Hell, I raked my uncle through the coals and asked him to explain a lot to me. He has a sole proprietorship LLC (easy enough - everything passes through). I did his 2553 for him and set it up as an S-corp with triple-A disbursements (for obvious reasons). However, he got flagged because apparently his base wage was a little on the absurd side. Didn't know that they had changed the rule for that recently. Since then, he's been writing off the strangest things. His is a consultant business, which means that he should have very few write-off expenses. This man will write off dinners with my aunt out on the town as business expenses. I swear...

Yeah, they're cracking down on S-Corp's too. A $5k "Shareholder's Compensation" and a $40k "Shareholder's Distribution" isn't going to cut it any more. You can kind of get around it by creating a "Loan Receivable - Shareholder" asset but if that account keeps growing and the wages don't there will be trouble farther down the road.

- edit -

As far as writing off stuff like dinners goes that's another area that can work out OK as long as it isn't abused. $100k Gross Receipts and $30k "Meals and Entertainment" is likely going to get you a look. Besides, that stuff is only partially deductible. He'd really be better off reimbursing himself for his out of pocket expenses and making sure that he keeps a log. Have him write out the reimbursement checks too instead of just recording them through a journal entry.