Updated July 27, 2015
IRS Audit Business Loss Chicago Illinois
An IRS audit on a business’losses
If you are being audited on a business that produces consistent loses, you might
be asking “Why would the IRS do such a silly thing?”
The question, from a taxation standpoint, is whether your enterprise
is a business or a hobby. If your enterprise is a hobby, then your losses
may not deductible.
The standard rule is that if a business shows losses in three of five consecutive
years, then it can be considered a hobby. But there are mitigating factors
that can determine that your activity is “for profit,” rather than
- Are the losses due to circumstances beyond the taxpayer’s control?
- Is a future profit expected to be made from the appreciation of assets?
- Has profit been made in similar activities in the past?
If your activity is determined to be a hobby, then your losses are subject
to the 2% miscellaneous deduction floor of Schedule A of Form 1040, the personal
income tax return.
Another reason your unprofitable company might be audited would take into
account your S-Status. If you have an S-Corp and you are showing losses, then
those losses will flow through to your personal return. If you have a basis
for the deductibility of the loss, then the losses can be deducted against
regular income and you will pay less income tax.
If you are paying less income tax because of a business loss, they might audit
you to make sure that the losses are reasonable.
Of course if the return was done wrong, with several areas being red-flagged
by the IRS diagnostic system, you will probably be audited regardless of any
income or loss.
If you are having problems with your IRS Audit Business Loss Chicago Illinois or have issues with your accounting in general, we would love to help. I enjoy hearing from my readers, and can be contacted at
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Chris Amundson is the President of Accounting Solutions Ltd., a full service public accounting firm of Certified Public Accountants and Enrolled Agents handling the bookkeeping, accounting, tax preparation, and audit representation needs of Businesses, Estates, Trusts, and Upper Income Individuals.