Opening home business to save taxes

Hi,
Tax consultant asked me if we want to open a home business to save taxes. Any feedback on this approach. Any one saving the taxes by using home business. Wondering how can we save a tax by setting up a business without any business income.

Thanks

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The only savings I can think of come from the home office deduction. It’s not that good IMO, usually more trouble than it’s worth.

You trolling? Or is your accountant trolling you?

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You need to have an actual business to take this deduction. Doesn’t have to be profitable but you should be able to describe what your business does, what expenses you incur, what revenues you pull, etc. If audited, the IRS will likely test the exclusive use for business requirement as well.

Ask your tax consultant what he/she thinks that you do that sound like it’d make you qualify for having a business and how you would meet all the requirement if audited. If they made the suggestion out of the blue without basis, pick another tax consultant. If they actually have a good idea about why you’d qualify, ask them these questions before you take the deductions and get audited. You may have to make changes to how you use rooms or computers in your home to make sure you qualify.

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I think it does have to be profitable, at least in 3rd year. last I checked you can’t deduct losses for more than 2 of the recent 5 years.

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Thats just to avoid questions, as a safe harbor. You can be unprofitable for decades, as long as you can show that your intention is to make a profit.

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CPA with a seasonal tax prep side-hustle here.

I would never advise any of my clients to do something for tax reasons. I ask them what they want to do (for financial or other reasons) and then tell them I can advise them on how to structure some of their business decisions in a way that will benefit them on their taxes, but not negatively affect their business, if possible. What your tax accountant is suggesting is beyond his expertise. There is either something missing from this story, you misunderstood him, or he is a bad tax accountant.

As for the profitability of a small business, @scripta is generally correct. There isn’t a hard and fast rule, because the IRS recognizes things happen, but generally speaking, you need to make a profit 3 out of 5 years. If you are unprofitable for decades, you risk the IRS checking, deciding your business was really a hobby, and them going back in time and disallowing your deductions. Your intentions don’t matter.

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Isnt that semantics? They’d determine it was a hobby only because they determined profit was not your motive. If they agree your intention was to be profitable, they wont decide it was just a hobby.

Your intention is about the only thing that matters. But I didnt say it would be an easy sell. :slight_smile:

“That’s just semantics,” is the exact sort of argument that gets the IRS off your back. Works every time!

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Maybe semantics wasnt the right term? If they look at your decades of losses and conclude it’s just a hobby, it’s because they determine that was your intention. Your intention is the only thing that matters, a profit (or lack there of) is just supporting evidence.

Forget about making profit, it sounded like OP did not have a business generating revenues in the first place. If OP still had no revenues after 3 years, I imagine the IRS would very quickly enforce the 3 years of profits in a 5 year span.

Now if OP dissolved the business before the end of the 5 years, I don’t know if the IRS can apply their test. Maybe OP could argue that they wanted to setup a business and it never took off, so stopped their losses after a few years. Even if that worked, that could be a great way to end up on top of the pile for who gets audited next, especially if they get increased funding for tax compliance.

More importantly, If that’s what the tax consultant had in mind the whole way, I’d switch to a more ethical one. Difference between advocating tax avoidance strategies and straight tax evasion schemes.

Tax consultant said,we can apply expenses for business to save tax. Looks like it is more complicated than just spend one time charge of $450 to open a business.

I got that impression too - “Hey, you could pretend to have a business and deduct your rent/mortgage!”

It doesnt work that way. Unless OP has a sincere business idea and desire to start a business (maybe there’s more context he neglected to mention), this was a very bad suggestion.

Hi,
I do not have any real business. It is a tax consultant suggestion to open a business to file some expenses.

That “tax consultant” is suggesting you commit tax fraud.

A business can only deduct business expenses. If you have no “real” business, you have no “real” business expenses to deduct.

He will insist it’s somehow legit, but his idea of “legit” is “you might not get caught”.

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^^^ Exactly. And if / when you DO get caught, it’s YOUR signature on the tax return and 100% your responsibility, not his.

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I’m just trolling here …

So if I’m retired and I buy a little shack on the beach and open a business that rents ~5 surfboards that I own but most of the time, I’m out surfing, as such the the store is only open when the surf is not up, but then when the surf isn’t up, the store is closed because there are no surfers, which includes me… So the only real time the store is open is when I’m between surfs taking a break. I’d lose money annual until I’m dead. :slight_smile:

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Kramer : It’s a write off for them.
Jerry : How is it a write off?
Kramer : They just write it off.
Jerry : Write it off of what?
Kramer : They just write it off!
Jerry : You don’t even know what a write off is, do you?
Kramer : No. Do you?
Jerry : No I don’t!!

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The only way this is good (and ethical) advice is if they know that you’re thinking about opening a real business or he paired that tax advice with an opportunity to open a real business based on something that you’re already doing. Say you already go to garage sales and love to repair stuff to decorate your home or gift to family, and he thinks you could expand this hobby into a proper business where you routinely resale the repaired/fixed/cleaned articles, then it could be legit to mention that you could turn your hobby into a revenue-generating business (and have the opportunity to deduct expenses such as your cost to drive around to garage sales, supplies used, etc.).

But if they only advised to fake having a business to take the home business expense deduction, they’re just advocating fraud and hinting that you may get away with it (leaving out that they crafted their engagement terms so that you’re screwed if you are audited).

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