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My Company Has Lost Money For the Past 6 Years. What Will The IRS Think? – Wahi

“Dear Jim,

I’ve a fulltime job as an IT consultant. I also have a food distribution business as well.
Your Question *
My company has lost every year for the past 6 years, and this year too, I’m in a loss.

Since it’s an ‘S’ corp, I’ve been posting the loss on my personal, which help me at least get some refund back from the Fed.

However, I’m concern that how would it appear to IRS?

Should I close the company? Or continue to support it?

Thanks,

Wahi”

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The Answer

Wahi:

Thanks for your questions.

Should you close your business?

Two perspectives here- first, the economic perspective. Is your business a viable going-concern, i.e. can it make money? If so, you will need to decide what the cost benefit is in pursuing it.

Second- is there a profit motive in your business? Section 183 of the Internal Revenue Code does not allow you to deduct hobby losses. It does not sound like a food distribution business is a hobby, so you may be safe from having your losses not allowed in an IRS audit. But if you are not trying to pursuit a profit, you may want to avoid the headaches and close the business, especially if the economics do not make sense.

How does the IRS view your losses every year?

Currently, the IRS has a very active program pursuing losses taken from S corporations. This is due to studies done by the IRS that show that a majority of taxpayers do not have the “basis” needed to deduct the loss. As you are probably aware, you need sufficient “basis” in order to deduct the loss. If you are putting cash into the business to fund the losses, the chances are that you can deduct the losses. However, it will still interest the IRS as the average overstated loss in an IRS audit of S corporation losses is over $21,000 per year audited.

Wahi, I hope this give you some perspective on how the IRS sees it. Most of these decisions are more economic, than IRS.

Much success to you.

My Company Has Lost Money For the Past 6 Years. What Will The IRS Think?   WahiJim Buttonow is one of the resident debt experts here at GetOutOfDebt.org that helps people for free. Jim is a licensed CPA who spent 19 years with the IRS coordinating large compliance teams of IRS agents and specialized personnel. In the last 5 years, Jim has invented consumer and practitioner software and treatises on how to address many different tax issues. He has also represented many people before the IRS examination, collection, filing, and appeals functions. He currently assists taxpayers on an active pro bono tax practice aimed at serving people in need. He can be reached at IRSMind.com.

If you have a tax question you’d like to ask just use the online form. I’m happy to help you totally for free.

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About Jim Buttonnow

Jim Buttonnow
Jim Buttonow, CPA/CITP, is cofounder of Beyond415. He has more than 26 years of experience in IRS practice and procedure. Reach Jim at [email protected].
  • http://www.moneyinfant.com/ Money Infant

    I would think that after 6 years of losses the IRS would start to take notice.  I also wonder if after 6 years of losses you might want to try something different?

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