Am I at more of a risk for an audit if my business took a loss?

[avigo45]

I have a couple of small businesses that I file with schedule Cs. One had a lot of expenses in 2022 and for the first time will be taking a loss unfortunately.

Since it has never taken a loss (I have filed at a profit for about 5 years), will this be a red flag and put me at more risk of an audit?

Is there anything I should or can do to mitigate this?

Thank you

[CatinaT1]

You are required to report all your income and expenses for your business and keep records and receipts of such. As long as you have done this, there is nothing to worry about.

Business expenses must be ordinary and necessary for your type of business. As long as you are not deducting frivolous expenses, there is nothing to worry about.

Businesses sometimes don't make a profit. As long as you are in business with the expectation of making a profit, again, there is nothing to worry about.

You said you have never taken a loss before, which is good. Typically the IRS looks at a five-year period. If you have losses for more than three out of five years, it could be reviewed to determine if the activity is being carried on as a business or a hobby. 

Nothing with the IRS is guaranteed. What you described does not raise a red flag, but that does not mean your return could not be pulled randomly.

[avigo45]

Thanks for your input. I have records and receipts so I'm not worried about that, just worried about the possible annoyance of having to deal with an audit!

[BrittanyS]

Claiming a loss doesn't make you more susceptible to an audit.  However, large deductions about income could.  When you enter your income and expenses in TurboTax, TurboTax will provide an audit risk assessment for each Schedule C. 

Although the business may have a higher risk for an audit, and there is no way to guarantee an audit won't occur, as CatinaT1 states, "You are required to report all your income and expenses for your business and keep records and receipts of such." 

Maintaining an accurate record will allow you to be prepared if an audit occurs.  

@avigo45