Sch C expenses, no income

[Janitor Bob]

Client studied, took exam, and received her realtor's license in early 2008.....She has a lot of expenses for 2008 (vehicle, business use of home, office expenses, etc), but no income...as she did not sell any houses in 2008. Her expenses and thus her Schedule C loss do not appear to be limited...as she has other income from a W-2 job that is much more than the Sch C loss......but is there any limit to what I should claim as a loss for 2008? Is there a way to amortize these start-up expenses over a few years? I am concerned that if not, she may face years with high income and not as much in expenses.

Thanks in advance for your wonderful assistance...everyone who helps me gets a gold star beside their name!

[MargaretMort]

I have had several would be realtors in the past few years. If they are actively pursuing the career I always have allowed the deductions, exam, office expenses, mileage. Right off the top of my head I would say they can't take an education expense. Most if not all of these people had other jobs at the same time. MM

[TAXBILLY]

1) The exam is not deductible since it qualified her for a new profession.

2) Unless there is something unusual here, realtors usually work for someone who provides a place of business and therefore she would not have an office in home expense.

3) If she keeps a mileage log, cell phone records, receipts for supplies, and did actively try to sell then there should be no problem taking these expenses.

taxbilly

[Denise]

I have had several situations similar to these in the past and my position is to amortize the expenses over 5 years pursuant to IRC Section 195, start up expenses. That way in years of income some of it can be offset by this initial investment of telephone charges, mileage and other business expenses.

[jasdlm]

I have done the same as Denise . . . amortized as start-up expenses over 5 years.

[imjulier]

I would take the expenses and allow the Sch C loss to offset other income. But it warrants a discussion with the taxpayer if this is really a business or is it a hobby. Profit motive is the main indicator and with a w-2 job it will start to look like a hobby after several years of losses. But not all businesses make a profit so check how much time the client spends in the business and act accordingly. Just my 2 cents.

Julie

[Janitor Bob]

I would take the expenses and allow the Sch C loss to offset other income. But it warrants a discussion with the taxpayer if this is really a business or is it a hobby. Profit motive is the main indicator and with a w-2 job it will start to look like a hobby after several years of losses. But not all businesses make a profit so check how much time the client spends in the business and act accordingly. Just my 2 cents.

Julie

This is exactly what I did....I discussed with her the hobby vs. business aspect....I informed her that similar losses next year may raise a red flag and that I would have strong reservations in classifying it as a business...we'll see

[kcjenkins]

Not fair, JB. If you consider the market in 08, she started at a terrible time. But she can certainly deduct losses for at least three years without any problems, and odds are good that by then she'll be making some money. let her save taxes now, and the good years will provide cash flow to pay the taxes on themselves. It's the sort of business where it's not that unusual for the first couple of years to be slim on income and high on expenses, that's not going to raise any flags.

[joanmcq]

Yeah, I think that may be why the box '1st year business' or whatever. Hey my first year doing taxes I lost money!!!

[jainen]

>>Not fair, JB. If you consider the market in 08, she started at a terrible time.<<

In my opinion, it is ALWAYS fair to consider the hobby loss rules. The fact that she started at a time when profit was particularly unlikely favors JB's concerns, because a true profit motive means conducting the activity in a business-like manner, which would normally include a market survey and sensible projections. Furthermore, the nature of real estate sales is often taken in the form of great personal pleasure--socializing, entertaining, travel, study, and (if you'll pardon the expression) plain old gossip.

I also disagree that "it's not that unusual for the first couple of years to be slim." My impression is that many Realtors begin by applying a natural aptitude informally, then get a license and come to a broker with several listings already in hand.

Okay, give her the benefit of the doubt the first year. Obvious deductions like MLS fees, advertising, and basic office supplies shouldn't be hard to accept. But things like the home office, mileage, cell phone, and meals require better records than a newbie is likely to have, so I would limit those to what can be reasonably supported in terms of business purpose as well as amount.

[OldJack]

>>Not fair, JB. If you consider the market in 08, she started at a terrible time.<<

I agree with KC. We are only the tax PREPARER and should not try to tell the taxpayer they are not in business when she obviously has gone to great lengths to obtain the necessary license and actions to say she is in business. She says she is in business when she gives the business numbers to you. We are NOT the IRS and should not audit the tax return as an IRS agent. I would expect any new business starting in 2008 to show a small profit or loss. The fact that there were no sales is irrelevant to deducting actual business expenses (loss).

Startup expense classification is limited to only certain expenses incurred BEFORE starting business and has nothing to do with when sale/income are recognized. Like TaxBilly said tho you need to verify that her business expenses qualify for deduction.