Sales loss a good thing?

Being able to write off the loss of a bad show should balance the profit of a good one, I mean we all have to pay taxes right? I didn't sell anything at the shows in 2013 but I plan to use the loss to my benefit.

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  • Robert, great story re: justifying the Xacto blades and the ensuing punishment you received for being successful.  :)

  • I get the feel that the 5th year had better show a profit ;-)
  • Wow, Robert, I had not seen that form before, but I was aware there were some exceptions for horse breeders.  

    That form makes an election to defer the determination on whether you have a profit motive.  It is not required.  If you file that form, basically you are saying that you don't know yet whether you have a business or a hobby.  And if you file it, I can guarantee they are going to take a much closer look at your return.  Basically you are inviting them to decide whether or not you have a profit motive instead of you deciding yourself.

    Even if you don't have a profit 2 out of 5 years, you are not required to file that form.  

    I can't envision any scenario in which I would file that form.  Instead, you would be better off to look at that worksheet that I mentioned to make sure you can document that you do have a profit motive.

  • A bad show is a reduction in cash flow and there are better ways to take a bigger bite out of tax liability, i.e. Purchasing equipment or doing studio repairs in the 4th quarter when you can see what is going to hit you tax wise. Buying more inventory isn't going to do it because net income increases as inventory value increases, so sell off outdated materials not being used. A few years back I sold a lot of common buckles and harness hardware on eBay that wasn't being used. A good financial advisor and accountant are worth their fees to help you with this stuff, and it doesn't hurt to have a working knowledge of accounting.
  • Karen, it takes special talent to write for government bureaucracy ;-) I worked for the state of Indiana for 12 years in a lower level technical position back over 30 years ago. I was responsible for, among other things, ordering supplies for my lab operation. One routine requisition included a bunch of Xacto blades; out of a supply requisition that was a couple thousand bucks, an upper level manager demanded to know why we needed $8 of Xacto blades. I was annoyed that the requisition was held up for this and responded with a note that they were needed for scraping detritus and some other 4-bit jargon that amounted to the same thing. We got the blades, and as a fall-out, I was the one designated as the justification writer for all kinds of projects where the project needed to be hidden in BS language. I thought it was amusing that a guy with an Asc degree is writing justifications on reqs for a bunch of PhDs who are trying to sneak stuff through the bureaucratic maze. 

  • I'm sorry, but I'm still laughing about the name of the form.  Wonder how many government employees it took to come up with that (after they finished screwing in the light bulb).

    My apologies to all readers with relatives/friends who are government employees.

  • That's great information, thank you!

  • Aaah-hah!! ;-P

    It's IRS Form 5213: 

    Election To Postpone Determination
    as To Whether the Presumption Applies That an
    Activity Is Engaged in for Profit

    http://www.irs.gov/pub/irs-pdf/f5213.pdf

    It applies to new businesses within the first five years, so it doesn't appear to be any good for the old timers, although changing media might count if you changed your business name.

    The directions on the form are a bit vague regarding the open ended question on 2a, but the IRS worker told me that you put down what you're doing and why the business tanked. Then you put down a mini-business plan of what you're planning to do to change things and turn it around. The taxpayer may be asked to supply records to document what has been going on, and that's where some of past laxness may have come back to bite me

    Oh, and it's good for 4 out of 5 years, so it looks like I had a double brain fart ;-)

  • Okay, I had a brain fart :-P The usual 2 out of 5 year loss allowance is a third year of loss allowed in the five. There is an IRS form, rather obscure perhaps, that allows excuses and a plea for mercy. I considered it last year, but after looking it over and realizing my lax records for a few years could be a detriment, I decided the negatives were more than the positives and slowly put the form down and backed away. Of course now I have to find the damn thing again, I think I was given the form number by a friendly IRS worker on the telephone and it may be a download.

  • OK, someone needs to clarify the tax rules here.  

    In order to have a business, you must have a "profit motive".  With some exceptions for particular industries, if you show a profit two out of five years you are deemed to have a profit motive.  If you do not show a profit 2 out of 5 years, the burden of proof is on the taxpayer to prove that they have a profit motive.  This would be in the event of an audit if the auditor challenged your "profit motive".

    If you do not have a profit motive, you have a hobby.  If you have a hobby, all your gross income is reported on page one of your 1040 and included in your adjusted gross income.  Any expenses (including cost of sales), are deductible up to the amount of sales, but only as a miscellaneous itemized deduction subject to a 2% AGI floor.  So if you don't itemize, no deduction.  Even if you do, you may not get a deduction.

    I am not aware of any form that is filed in the 4th loss year that Robert is referring to.  There is a worksheet with questions to answer that helps to determine if you have a profit motive.  This is NOT a form that is filed with the IRS.  If there were such a form, it would indeed be a "red flag" form.  If I get a chance, next time I'm in the office I will see if I can find that worksheet for you guys and post a link here.  It would be worth looking at.

    A person who consistently claims large losses is at a much higher risk for being audited.  I had a client who had a few years of real estate losses and got audited.  The auditor brought up the profit motive issue but gave it up real quick because the business had made money in the past.  In addition we had to show where all her money came from -- every bank deposit for two years.  (Because they want to know where the money comes from to pay for all those losses.)

     

    Disclaimer:  If this Email/post contains tax advice, “Please be advised that based on current IRS rules and standards, the advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS should assess related to this matter.  

     

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