need some input -potentail new client -
Anne Sadler
Matthew Bigelow
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Matthew Bigelow, E.A.
JLZ Business Services, Inc.
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From: 'Anne Sadler' via ClientWhysConnect <clientwh...@googlegroups.com>
Sent: 07/09/2024 2:27 PM
To: ClientWhysConnect <clientwh...@googlegroups.com>
Subject: [clientwhysconnect] need some input -potentail new client -
Hello everyone,
I have 2 things:
1) Business owner open business in 2019, filed every year without income but expenses.. I have never seen a schedule C filed for so many years without any income only $ 12k in expenses.
I am not comfortable filing the 2023 with no income , am I missing something here? Very fishy for there to be only expenses for so many years in a row and no revenue (I’m assuming when you say “without any income” you mean no revenues). This does not pass the smell test as a business, whose motive, after all, is to turn a profit. How is something a business that only generates expenses and, in five years, doesn’t take in any revenue? While the determination if an activity rises to the level of business is one of facts and circumstances, the general presumption is that it is presumed to be engaged in for profit if it is profitable for three of five consecutive years. Your client is zero for five, and not only doesn’t have a profit, but apparently, no revenue.
2) business is an SMLLC but no 568 filed ? Did that change? I was under the understanding that all LLC have to file the 568 with their 540. A 568 is required for each year the activity exists as an SMLLC. I’ve never filed it along with a 540 but that could be my software’s limitation.
Looking forward to getting some input.
Thank you
Best regards,
Anne Sadler
Enrolled Agent # 78867
Sadler Taxes, Inc
707-486-1715 cell phone
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Diana Skocypec
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Lee Reams
Anne,
It's understandable to be concerned about filing a Schedule C with no income for multiple years. Here are a few points to consider:
Hobby vs. Business: The IRS distinguishes between a business and a hobby. A business is an activity carried out with the intention of making a profit, whereas a hobby is not. If the activity is not generating income and there is no clear path to profitability, the IRS might classify it as a hobby. Expenses related to a hobby are not deductible in the same way as business expenses.
Profit Motive: The IRS expects a business to show a profit in at least three out of five consecutive years. If the business does not meet this criterion, it may be subject to additional scrutiny to determine if it is indeed a business or a hobby.
IRS Determination Factors: Failing to meet the "three out of five years" rule does not automatically classify an activity as a hobby. The IRS uses a set of nine factors to determine whether an activity is engaged in for profit or is a hobby. While the "three out of five years" rule (or "two out of seven years" for horse-related activities) provides a presumption of profit motive, failing to meet this presumption does not automatically classify the activity as a hobby. The IRS will consider the following factors:
1. Manner In Which the Activity Is Conducted: Are accurate records kept? Is there a business plan?
2. Expertise of the Taxpayer: Does the taxpayer have the necessary knowledge or have they sought advice?
3. Time and Effort Expended: Is significant time and effort put into the activity?
4. Is There Potential for Asset Appreciation?
5. Success in Carrying on Similar Activities: Has the taxpayer been successful in similar activities in the past?
6. History of Income or Losses: Are losses due to circumstances beyond the taxpayer's control or are they typical startup losses?
7. Occasional profits, if any: Are there occasional profits?
8. Financial status of the taxpayer: Does the taxpayer have substantial income from other sources?
9. Elements of personal pleasure or recreation: Is the activity conducted for personal pleasure or recreation?
If, after considering these factors, the IRS determines that the activity is not engaged in for profit, it will be classified as a hobby.
It would seem your client is digging himself a large hole should the IRS pick up on the no income. No doubt in your case the client would owe taxes on all the prior open years.
A 568 is required for each year the activity exists as an SMLLC. You indicated a 568 has never been filed. Thus, I assume the client is also behind on the LLC fees.
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Anne Sadler
Anne Sadler
Anne Sadler
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