New Ventures

[Curlydoc17]

I started a consulting business in 2020. I have been doing a lot of pro-bono work for nonprofits to get my name out there. I looks like I will have a loss of about 20k this year. 1)What are the odds of me getting audited? 2) How can I protect myself? 3) Are probono invoices enough?

[KochuK]

Hi Curlydoc17, thank you for joining the TurboTax Special Forum today.

Congrats on your starting a consulting business in 2020 and made great effort in getting your name out there.

In general, consulting business is self employment, and the operation result is reported on Schedule C Profit or Loss from Business. 

The IRS expects that if you start a business, you intend to make money at it. If you don't, your business might be a hobby. The IRS safe harbor rule is that if you have turned a profit in at least three of five consecutive years, the IRS will presume that you are engaged in it for profit.

https://turbotax.intuit.com/tax-tips/small-business-taxes/when-the-irs-classifies-your-business-as-a...

The pro bono work for nonprofits  could fall into the category of charitable donations for Schedule A Itemized Deductions, but not as a Schedule C (sole proprietor or Single Member LLC) business expenses -

Quote

Out-of-Pocket Expenses in Giving Services

Although you can't deduct the value of your services given to a qualified organization, you may be able to deduct some amounts you pay in giving services to a qualified organization. The amounts must be: • Unreimbursed; • Directly connected with the services; • Expenses you had only because of the services you gave; and • Not personal, living, or family expenses.

Unquote

Page 6 of IRS Pub 526 Charitable Contributions

https://www.irs.gov/forms-pubs/about-publication-526

I hope the above provides some guidelines to your questions since it is hard to predict which tax returns would be selected for audit based on IRS computer algorithm.

[melj1]

Any professional work that is done pro bono has limitations to what you can claim. From the IRS, they state that “Although you cannot deduct the value of your services given to a qualified organization, you may be able to deduct some amounts you pay in giving services to a qualified organization.

Generally the amounts that are deductible are the out of pocket expenses related to your work. You time is not deductible. 

We cannot estimate the chances of any return being audited, returns that have a loss on a Schedule C are more likely to be audited.