Is this my stupidest idea yet...or most brilliant?

Let's say for a minute I wanted to take advantage of the system a bit and keep more of my own dollars.  Could I start a business and more all of my expenses under it's "umbrella" and never do any actual business thereby having a capital loss that I can write off my taxes?

Next level: get a circle of friends who are engaged in similar activities and we all name ourselves to the boards of directors for each of each others' companies getting whatever perks we can figure out at that level.

End game, bootstrap myself (and perhaps these fellow board members) into the CEO class where "real" companies will pay us millions to run their organizations into the ground and escape under our golden parachutes.

Have I cracked the code?  I think I need a slightly shady accountant and a decent lawyer.  (I'd say shady lawyer but that was implied by "lawyer")

You can get away with losses for a while, then the IRS will reclassify your business as a hobby and disallow any deductions from it. You have to show a "profit motive" in a business.

Short answer: no. As stated, you could get away with it for a while, but it's not like you're the first person to think of this.

You missed a step. You need a separate business in somewhere that doesn't tax, like say the Cayman Islands, or Ireland (this may have been fixed), or a war zone (remember, no taxes made on profits in war zones because of the inherent risk), that will rent or lease something from your business here for exactly what you bring in during the year. Then, you have no income to be taxed because it's all going to your tax free company as a payment. 

If it's good enough for the ruling class, it's good enough for the working class. 

I know people that have been doing what you're proposing for years.

Our current Prime Minister, while campaigning, once said (foolishly) that small businesses are only set up in order to lose money for tax purposes.

I wonder where he got that idea from.

I think this is one of those situations where if you spent the effort working instead of trying to avoid taxes, you'd likely end up with more money in the long run. 

In reply to KyAllroad :

I hear that Mazars accounting not only has experience in such work, but has suddenly found some extra bandwith to take on new clients.

dculberson said:

You can get away with losses for a while, then the IRS will reclassify your business as a hobby and disallow any deductions from it. You have to show a "profit motive" in a business.

Yup... They give you enough time (and losses) to get something off the ground, but dawdle too long and they'll have their way with you. 

Someone much much smarter and richer than I am once said this- 'The Feds ALWAYS get their money.  You think you can game them, but they're constantly gaming you.' 

dculberson said:

You can get away with losses for a while, then the IRS will reclassify your business as a hobby and disallow any deductions from it. You have to show a "profit motive" in a business.

^This

I own a small business and my legitimate deductions for mileage, etc. put me in the red every year so I don't declare as much as I leagally could every other year to show a slight profit.  I was hoping the IRS would lighten up due to COVID but in May of 2021 an announcement was made that they're hiring 52,000 additional agents so obviously they're going to need to justify their existance by cracking down more not less.

It sucks as I'm not cheating at all but need to pay too much tax to avoid being classified a hobbyist. 

NOHOME said:

In reply to KyAllroad :

I hear that Mazars accounting not only has experience in such work, but has suddenly found some extra bandwith to take on new clients.

Good one!

RX Reven' said:

dculberson said:

You can get away with losses for a while, then the IRS will reclassify your business as a hobby and disallow any deductions from it. You have to show a "profit motive" in a business.

^This

I own a small business and my legitimate deductions for mileage, etc. put me in the red every year so I don't declare as much as I leagally could every other year to show a slight profit.  I was hoping the IRS would lighten up due to COVID but in May of 2021 an announcement was made that they're hiring 52,000 additional agents so obviously they're going to need to justify their existance by cracking down more not less.

It sucks as I'm not cheating at all but need to pay too much tax to avoid being classified a hobbyist. 

Same deal for me. The mileage is ridiculously overpriced IMHO, but I'm going to take advantage. 

In reply to mtn :

Yep. 4,200 miles per year at 2022's 58.5 cents per mile = $2,457.  I just use a little Mazda CX-3 that couldn't get less 33 mpg if it tried so even with California's near $5 per gallon, I'm just at 15 cents per mile for gas, change my own oil, blah, blah, blah...I'm way short of 58.5 cents per mile. 

Is there somewhere we are supposed to vote on one of the thread title choices?

I am pretty sure you explained above in great detail how the last guy ended up in the white house.

You can run at a loss 2/5 years with zero scrutiny iirc, and pretty much forever if you document it. 

RX Reven' said:

In reply to mtn :

Yep. 4,200 miles per year at 2022's 58.5 cents per mile = $2,457.  I just use a little Mazda CX-3 that couldn't get less 33 mpg if it tried so even with California's near $5 per gallon, I'm just at 15 cents per mile for gas, change my own oil, blah, blah, blah...I'm way short of 58.5 cents per mile. 

This goes to show how ignorant I am of tax law and just let a pro handle my, incredibly easy taxes because I got into the habit of it about a decade ago. 

What does the price of gas, maintenance, self oil changes etc, have to do with anything? I thought it was just "If you have 10k miles you can write off, you write off 10k x 58.5 cents per mil" and move on? 

Apparently it's not that simple? 

Ok so can someone explain hobby vs business? If I had an Etsy or something similar setup, selling a few small things that are related to a hobby how do I deal with that?

Form 1040 - Schedule C "Profit or Loss From Business"

Part IV - Line #44 - Section a "Business Mileage" which gets carried up to Part II - Line #9 "Car and truck expenses"

BTW, I'm not a tax expert...don't trust me.  

93EXCivic said:

Ok so can someone explain hobby vs business? If I had an Etsy or something similar setup, selling a few small things that are related to a hobby how do I deal with that?

If you're expecting to make a profit on the business, it is a business and you have to show profit in at least 3 of the last 5 years. If you're not doing it for profit, it is a hobby. If it is hobby income, you can only deduct up to the amount of income from the business, and no more. If it is a business, you can deduct more than the income, which ultimately is a further deduction to your overall income... 2 years out of 5. 

For instance, I referee hockey. In 2018, I missed my busiest 6 weeks of the year and had a few weekends that were out of state that I could deduct a ridiculous amount of mileage on. Crossing every T and dotting every I, I showed a loss. I also showed a loss in 2020 due to the pandemic. Knowing that I could not show a loss in 2021, I bought new skates in 2020, paid for my 2021 registration in advance, bought all the equipment I thought I may need over the next two or three years, and depreciated all of my equipment that I already had and made my loss greater than it would have been under normal circumstances. Then in 2021, I didn't have a loss, because I was able to put so much of the expense that I would have realized in 2021 into 2020. If I hadn't done that, I would have had to show profit in 2021, even if I didn't have it, or risk the business being reclassified as hobby income. 

I'm not a tax expert, and I don't know that what I've explained here makes sense. I do consult with my accountant prior to making these decisions to avoid any trouble, though if they're coming after me, it would be a horrible investment of the IRS's time.

RX Reven' said:

Form 1040 - Schedule C "Profit or Loss From Business"

Part IV - Line #44 - Section a "Business Mileage" which gets carried up to Part II - Line #9 "Car and truck expenses"

BTW, I'm not a tax expert...don't trust me.  

Oh no worries, I wasn't looking to you for tax advice as none of this applies to me. I was just curious about the mechanics behind it.

You can do that until you get caught.

Or Google How long did it take for Amazon to break even in the US?

9 1/4 years...

RX Reven' said:

In reply to mtn :

Yep. 4,200 miles per year at 2022's 58.5 cents per mile = $2,457.  I just use a little Mazda CX-3 that couldn't get less 33 mpg if it tried so even with California's near $5 per gallon, I'm just at 15 cents per mile for gas, change my own oil, blah, blah, blah...I'm way short of 58.5 cents per mile. 

I drive 50,000 miles per year for business...

z31maniac said:

This goes to show how ignorant I am of tax law and just let a pro handle my, incredibly easy taxes because I got into the habit of it about a decade ago. 

What does the price of gas, maintenance, self oil changes etc, have to do with anything? I thought it was just "If you have 10k miles you can write off, you write off 10k x 58.5 cents per mil" and move on? 

Apparently it's not that simple? 

It is that simple, what RX Reven' was saying is that by writing off mileage at 58.5 cents per mile he's writing off way more than it actually cost him. No matter how efficient you are with vehicle costs you can still write off 58.5 cents per mile so it's a profit center for some people.

SV reX said:

RX Reven' said:

In reply to mtn :

Yep. 4,200 miles per year at 2022's 58.5 cents per mile = $2,457.  I just use a little Mazda CX-3 that couldn't get less 33 mpg if it tried so even with California's near $5 per gallon, I'm just at 15 cents per mile for gas, change my own oil, blah, blah, blah...I'm way short of 58.5 cents per mile. 

I drive 50,000 miles per year for business...

Holy camoly, that's got to be in the 800 to a 1,000 hour range.

In 2019, pre-COVID, my business cummute was 137,500 miles but I was going a little faster so the hours were less

In reply to RX Reven' :

Yep. 
 

I've done that every year for the past 7 years. 

In reply to mtn :

So if I am not sure if I will make a profit, I should just deduct as a hobby. I mean is there some minimum amount I need to sell/make to even worry about it