Question by ladybug: Why do you still have to file taxes when your small business has a financial loss?
I’m trying to understand what the taxes would be based on if you didn’t make a profit. Do you get a bigger refund the higher your reported loss??
The business doesn’t have any employees.
Answer by DidYouSearch?
Two reasons (of many I’m sure):
1. Some of your losses may be eligible to ‘carry forward’ to offset future earnings or ‘carry back’ to refund past taxes paid in previous years.
2. The IRS is focusing more closely on small businesses to determine whether you are really ‘in business with a profit making motive’ or just trying to create losses to offset other tax liabilities. If they decide that you aren’t a ‘for-profit business’ (basically calling you a hobby business) they will only allow you to deduct expenses equal to your revenues eliminating any tax losses that might offset other tax liabilities. This is potentially a huge deal to small business startup that you might want to research more. There was another recent question about this issue here:
Know better? Leave your own answer in the comments!