Discussion:Amending a return: bigger refund vs net operating loss

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Discussion Forum Index --> General Chat --> Amending a return: bigger refund vs net operating loss

Flyguy (talk|edits) said:

February 4, 2008
Do you ever have one of those moments when you check and double-check and have your wife look over things and right after you hit the button to file, remember something? I had one of those moments last night. I forgot to include the 1098 mortgage interest from my second mortgage on my return. At first, I thought "no big deal - file a 1040X and yea - bigger refund!" Just one issue that makes me nervous. I own a (very) small computer business that, for various reasons, has not shown a profit for the last couple of years. My profit this year was a whopping $68 (and that was only because I ignore several legitimate deductions just to show a profit), but if I adjust the return to include the additional mortgage interest, the additional deduction on my Schedule C/8829 makes for a net loss. My question is, will the "must be profitable 3 out of 5 years" rule send up red flags if I stay at a loss this year? It's not really loss since a large chunk of my (small) profit gets deducted from real estate taxes and mortgage interest, but I figured the IRS computers only see negative and positive numbers.
  • Is it worth the extra $500 refund to risk having my business classified as a hobby and wiping out business deductions for the last three years?
  • Can I just amended the Schedule A/1040 and choose not to take the extra deduction on the Schedule C, or will that send up more red flags?

Thanks for any suggestions.


Oh yeah: I thought this should go in the Tax category, but I got scared off by the This is only for Tax Professionals warning

Taocpa (talk|edits) said:

4 February 2008
The first question you have to ask yourself:

Is it really a hobby?

If your job is to do computer repairs and you come home and moonlight for others and claim it on Schedule C, I doubt it. Many years ago, a tax partner of one of the now Final Four told me as much with my tax business that was losing money every year for a few years while I worked during the day as a Controller/CFO. Now that I do it for a living I try not to lose money.

The hobby loss rules are around to keep people from taking losses in selling macrame pot holders, Amway, Mary Kay and the like.

There is also a nine factor test outlined in Reg Sec. 1.183-2(a) that details what the IRS looks for in this regard. Here's the link:

Treasury Regulations, Subchapter A, Sec. 1.183-2

Without knowing more, you may feel safer wiping out your $68 profit with a $68 legitimate business deduction, taking the additional interest on your Schedule A, filing your 1040X and getting your refund.


Flyguy (talk|edits) said:

February 4, 2008
 Thanks for the response.  As much fun as it is, I am engaged in my side business to make money.  The losses in recent years is mostly due to unpaid debt that I am still holding out hope for.  As I said, I did manage to make some money this year, but the tax deductions from my home office turn my profit into a loss (on paper, I guess?).  Can I elect to take the additional mortgage interest deduction on my Schedule A and not on my Schedule C, or would that just raise more questions?

Taocpa (talk|edits) said:

4 February 2008
Well, you need to take the additional mortgage interest on Form 8829 first and then the remainder flows to Schedule A after that.

My suggestion was geared more to asking why take the home office deduction in the first place? But again, without knowing more, I can't say whether you are entitled to that as a deduction. That's on your conscience. If you aren't entitled to it, that's more a problem than a whopping $68.

While you may not think this is a complicated situation (and it might not be), based on your message, you may need the advice of a professional at this point. You might want to consider it.


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