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Jean   Murray

Can I Deduct Business Expenses If My Business Isn't Profitable?

By November 19, 2012

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Many new business owners are concerned that several years of business losses may target them by the IRS as a "hobby loss business,"  formed for the purpose of having fun and using business expenses to lower taxes, not make a profit. But even if you have losses for several years, you might get a break from the Tax Court if you can show that your intent is profits, not losses.

At issue here is whether you can deduct business expenses and reduce your business (and personal) taxes. If you are running legitimate business, with every intent to make a profit, you can deduct those expenses. If you are just running a hobby, with no intent to make a profit, you can't.

A recent Tax Court case illustrates how one business owner was able to convince the Tax Court that he was running a legitimate business. He had 8 years of losses, and the 9th year he had only a very small profit. But he did some other things right:

  • He kept good business records on his computer
  • He set up a separate business checking account
  • He paid for advice from experts
  • He spent a lot of time working on the business

In general, the business owner was able to show that the business was not just for his personal pleasure, but was for the purpose of making a profit. The Tax Court considered all the factors in this case, as they determined that the business was indeed for the purpose of making a profit, and that his business expenses were tax deductible.

Of course, this case should not be taken as a precedent, nor should you assume that your case would receive the same determination. Every case is different, but the factors described here are important in all cases, particularly the concept that operate in a business-like manner. If you have questions about this concept, consult your tax advisor.

Read more:

Deducting Business Expenses Even If Your Business is Unprofitable

How to Avoid Having Your Business Considered a Hobby

Do I Need a Separate Business Checking Account?

Source: T.C. Summ. Op. 2012-105 (PDF)

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