Schedule C question

[sandette40]

Hello:  I have a travel business for additional income.   Due to the pandemic, I received a lot of cancellations and gave refunds that included loss commission.   Under Business Income/Income You Gave Back, can I enter the amount pertaining to loss commission?  I ask this question because the amount may be larger than income on my 1099.   Also, the expenses for  my business is more than the income i received.  Will this trigger an audit?   Any advice will help.  Thanks.

[Opus 17]

No.  For cash basis taxpayers (which is almost everyone) income that you did not receive is just that -- income you did not receive.  You can't take a deduction because you can't subtract something that was never part of your income to begin with.   Your taxes are lower because you had less income.   A refund would be money you paid back from money you had already received and reported as income.  

For certain taxpayers who use accrual accounting, they book the revenue when a contract is signed, so accrual taxpayers would take a deduction for a cancelled contract.  But remember, they are subtracting a payment that was never made from income they already reported (even though they hadn't been actually paid yet).

Expenses more than income is fairly normal, lots of businesses operate at a loss.  Your loss may be deductible against other income or it may carry forward to offset future profits.  If you make a loss in more than 3 out of 5 years, the IRS will look to see if you should reclassify your activities as a hobby.  But one or two years of losses are unfortunately normal. 

[Bsch4477]

Not sure what loss commission is. If it is money you would have gotten but did not, you can’t deduct that. Many businesses do not have a profit from time to time. If you have good records you need not be concerned. If you have a loss more than 2 times in 5 years you will be considered as having a hobby and can’t deduct any expenses. 

EDIT.  3 times in 5 years is correct as pointed out by @Opus 17. 

[Opus 17]

Let me put it another way.

Suppose you booked a trip for someone that was $1000, of which $100 was your commission.  They cancel and you refund the $1000.  You can report the $1000 received as gross sales and the $1000 paid back as an expense.  You don't record anything extra for the lost $100 of commission income.  You never received it, so it won't be taxed, but it's not an additional deduction. 

[Opus 17]

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@Bsch4477 wrote:

Not sure what loss commission is. If it is money you would have gotten but did not, you can’t deduct that. Many businesses do not have a profit from time to time. If you have good records you need not be concerned. If you have a loss more than 2 times in 5 years you will be considered as having a hobby and can’t deduct any expenses. 

EDIT.  3 times in 5 years is correct as pointed out by @Opus 17. 

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Note that even if you have several years of losses and the IRS presumes you really have a hobby, that is a rebuttable presumption.  You can still try to show (if you can) that it is a legitimate business, by a showing of facts and circumstances.  

[tagteam]

The IRS does not presume that an activity is a hobby (or not engaged in for profit). The IRS considers all of the facts and circumstances surrounding the activity.

There is a rebuttable presumption that an activity is engaged in for profit if the activity is profitable in at least three of the last five tax years.

See https://www.irs.gov/pub/irs-news/fs-08-23.pdf