@Daniel_284 wrote:
Not reporting an expense, is there anything wrong with this?
This subject is open to debate with respect to taking various other deductions, but not with respect to net earnings from self-employment.
Revenue Ruling 56-407, 2 C.B. 564, addressed the issue of whether taxpayers may disregard allowable deductions in computing net earnings from self-employment for self-employment tax purposes. Rev. Rul. 56-407 held that under § 1402(a), every taxpayer (with the exception of certain farm operators) must claim all allowable deductions in computing net earnings from self-employment for self-employment tax purposes.
See also https://www.eitc.irs.gov/tax-preparer-toolkit/frequently-asked-questions/earned-income-self-employme...
With respect to the "3 out of 5" hobby loss rule, the presumption favors the taxpayer. In other words, if the activity is profitable in 3 or more taxable years out of 5 consecutive taxable years, then there is a rebuttable presumption that the activity is engaged in for profit. The opposite is not the case (i.e., there is no presumption that the activity is not engaged in for profit for any period unless the IRS establishes otherwise).
See Section 183(d).
