OkieTaxGal Posted March 19, 2011 Report Share Posted March 19, 2011 I feel really stupid asking this question. This should of been so simple. Does the two out of five year profit test that the IRS uses for the first five years continue on after five years. Do you need to show your making a profit at least two out of every five years of the business?? I always thought so but I could only find on the IRS web site about the initial five year test. I have a new client that after looking at his last two years tax returns has already had several years of losses in a row on his schedule c's. He has a baling business and has lots of depreciation on heavy equipment but not much income. I thought I needed to look into it more. Mostly it's depreciation thats causing the loss. But the IRS.gov wasn't much help to me this time;) Or I just didn't know where to look. Thanks for any help Quote Link to comment Share on other sites More sharing options...
Achmid Posted March 19, 2011 Report Share Posted March 19, 2011 Grow up! Quote Link to comment Share on other sites More sharing options...
rfassett Posted March 19, 2011 Report Share Posted March 19, 2011 It is really a facts and circumstances test. I tell my clients that if you look like a business, act like a business, smell like a business, etc, then there is nothing in the code that dissallows a loss year after year. All that is required is that there must be a "profit motive". From a practical perspective, I continue to tell them, you better be prepared to explain WHY you continue operating a "loss" business and HOW you are buying your groceries and paying your rent. Quote Link to comment Share on other sites More sharing options...
OkieTaxGal Posted March 19, 2011 Author Report Share Posted March 19, 2011 Grow up! I'm sorry Achmid if I offeded you. I have been using atx and the community for over ten years and everyone has always been very nice and helpful. Have a great day and may God bless you!! Quote Link to comment Share on other sites More sharing options...
OkieTaxGal Posted March 19, 2011 Author Report Share Posted March 19, 2011 Thank you for the help and better understanding! That's great advice. Quote Link to comment Share on other sites More sharing options...
Pacun Posted March 19, 2011 Report Share Posted March 19, 2011 Grow up! I wonder why this short answer to a legit question. Rfassett gave you a good answer. Keep in mind that the way the economy has been acting in the past 3 years, I don't think the IRS will challenge many businesses for not having a profit for the last 3 years in a row. Quote Link to comment Share on other sites More sharing options...
jainen Posted March 19, 2011 Report Share Posted March 19, 2011 >>there must be a "profit motive"<< If it has been years since they showed a profit and they keep doing the same thing anyway, it's kind of circular argument that they must have some other motive. It might not be a tax motive. Maybe they have some commitment to the family name or something. The IRS wants to see that the business is making a bona fide effort--getting training or professional help, upgrading equipment, seeking new markets for new products. Quote Link to comment Share on other sites More sharing options...
OkieTaxGal Posted March 19, 2011 Author Report Share Posted March 19, 2011 I wonder why this short answer to a legit question. Rfassett gave you a good answer. Keep in mind that the way the economy has been acting in the past 3 years, I don't think the IRS will challenge many businesses for not having a profit for the last 3 years in a row. That does make since, too!! A lot of small businesses are having a hard go of it right now. I wondered if the short answers are just to get out of the newbie status. :) Quote Link to comment Share on other sites More sharing options...
Lion EA Posted March 19, 2011 Report Share Posted March 19, 2011 I don't worry much if the business has a positive cash flow and only depreciation results in the paper loss. And, I think privately-owned farms can always make a case for selling property at a gain in the future. But, it's facts and circumstances, so make sure you know your client's facts and circumstances. Quote Link to comment Share on other sites More sharing options...
Bart Posted March 19, 2011 Report Share Posted March 19, 2011 Grow up! I am not sure I can answer as well as this person did but I will add my two cents. My understanding is that the IRS can pick any five years in a moving window to see if there is a profit in THREE out of five years (code sec 183(d)). That is just the safe harbor rule. As rfassett stated, if you do not satisfy the safe harbor you can still prove you are a business by facts and circumstances. Quote Link to comment Share on other sites More sharing options...
OldJack Posted March 20, 2011 Report Share Posted March 20, 2011 It has been my experience that the IRS only challenges profit motive in obvious and questionable cases. Mainly cases that are commonly considered a hobby. Achmid's comment is inappropriate. Quote Link to comment Share on other sites More sharing options...
michaelmars Posted March 20, 2011 Report Share Posted March 20, 2011 It has been my experience that the IRS only challenges profit motive in obvious and questionable cases. Mainly cases that are commonly considered a hobby. Achmid's comment is inappropriate. correct, many professions show losses for many years, ie authors, actors etc, real estate can be losses until the mortgage is paid or the depreciation is ended. Now with the 100% depr w/o of sec 179 losses are becoming common [or break evens. Quote Link to comment Share on other sites More sharing options...
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