MTM trader Net Income only shows expenses?

[likesky1010]

MTM trader's gain/losses are entered into 4797 form.  I have some gains there. The gains are more than the expenses. The gains/losses will not be shown in the trader's Net Income. When I added the home office expense, the Net Income changed from 0 to a negative number. This directly causes the Audit Risk from Low to Medium.  I think there must be something wrong here. Please help.

BTW, 

The free Audit Support Guarantee link doesn't work.

[ThomasM125]

Reporting a home office on your tax return would increase your audit risk, as that deduction has a lot of opportunity for inaccuracies associated with it. The main problem is that the office space must be used exclusively for business purposes, which can be hard to do since you are living in the house. For instance, the mere presence of a television in your home office would be grounds for the IRS to disallow the deduction, as watching television would be a personal thing and would thus violate the exclusive business use test.

A negative business income would also increase your audit risk, as you must have a profit motive to have a legitimate business and thus be able to deduct a loss from it on your tax return.

[Mike9241]

That is correct. As a MTM trader expenses go on Schedule C.  Your MTM (trading) income/loss goes to Form 4797 and from there to line 4 on schedule 1.   You have to decide if the HO deduction is worth the increased risk of audit.   Another potential issue is if your schedule C loss, Trading profits and HO deuction routinely result in a net loss.  the IRS could deny you the deduction on the basis that the activity was not enter into for profit. Code section 183 

[likesky1010]

@ThomasM125 @Mike9241 
The "issue" here is not the home office. I have reported this home office for about 10 years. It is a valid home office. This year the MTM trader business was added in. It will share the same home office. 

The new MTM trader business has a bigger gain than the expense of the home office, entered in the 4797 Form.  The "issue" here is that the TurboTax did not count the gains from the 4797 Form. It only takes the expenses in the business Net Income screen for the MTM trader business. Because of that, the Net Income only shows a negative number of expenses.  Because the MTM trader business's Net Income is negative, and also a home office is claimed, TurboTax considers there is a bigger risk of being audited, I think.

But the reality is that the MTM trader business is not a loss business. There are some profits. Why does TurboTax handle it like it is a loss business? This is what confuses me. If an MTM trader business should be handled like this. I am fine to file the current result to the IRS. I hope I can get a confirmation that the TurboTax is correct.

[likesky1010]

@Mike9241 

I thought it would be better to claim a home office for the new MTM trader business.  Otherwise, how will the IRS consider you are seriously handling the trading as a business? If the home office is not one of the factors for the IRS to agree with you your trading is a business, not a hobby, I will not share the home office with the new trader business. 

[DaveF1006]

The issue is, since Schedule C reports only expenses, the Home Office expense isn't allowed because you are already showing a net loss on Schedule C because Form 4797 isn't reflected in Schedule C. The audit risk meter may not be correct because your trader's business income is reported on Form 4797 instead of Schedule C, which is less common.

You could ignore this risk because if it is flagged, the IRS should recognize you are a MTM trader and should recognize the type of tax return you submitted. 

Just to be safe, you may decide not to share the Home Office with your new business if it means lessening your chance for an audit.

@likesky1010 

[likesky1010]

@DaveF1006  Why treat MTM traders (or 4797 Form users) this way? Is it an issue? Is it an IRS issue or a TurboTax issue?

[KrisD15]

HERE is a link that address filing as a trader using TurboTax and also the issue of entering Home Office Expenses. 

[likesky1010]

@KrisD15  After I added the 4797 gains to the 8829 Form, it became worse in terms of audit risk. The trader business's Net Income changed from -$265 to -$431. Audit risk is still Medium. However, it makes me pay a little less tax.