Small business dissolution

[terimac4]

Good morning,

Two years ago, we started a small side business selling goods, and both years, we had losses, even though last year was not as bad. This year, we still have a loss, and we don't want to claim a third year of losses on our taxes. Can we just note it as a hobby business on TT, or do we have to indicate we dissolved it? 

What happens if it makes a profit next year? Can we just again list it on TT? Is there a minimum on the profit we need to claim? 

Thank you!

[AnnetteB6]

If you decide to claim the 2024 income as hobby income, then you will not be able to claim any expenses against the income. 

If you plan to continue to operate the business with an intent to make money and you have a profit during 2025, then you would go back to reporting the income and expenses on Schedule C.  However, you could not recover any of the expenses lost in 2024 by claiming the income as a hobby.

Take a look at the following TurboTax article to learn more about hobby income versus business income.  This may help to clarify the situation for you.  Keep in mind that there is no strict guideline for how much of a loss is too much, or how much of a profit is not enough.  If the numbers are large enough that the losses are offsetting a big percentage of your other income, then it would appear more questionable by the IRS that you had a hobby and not a business.  

When the IRS Classifies Your Business as a Hobby
 

[terimac4]

Thank you. I did read the article.

So my last question would be, if we continue to sell products, even in small amounts, we have to claim the income, correct? I do understand about not claiming expenses if it's deemed a hobby business.

I am still unclear how much profit they want you to make to continue to claim as a business. Is $100 profit enough? $1000?

If possible, how much in sales can you have without claiming any income? I want to do things correctly! 

[AnnetteB6]

Yes, if you do continue to sell products and have income, then that income must be reported in order to file a complete and accurate tax return.  There is not an amount of sales that you can have without claiming the income.  You are expected to report all worldwide income each year as part of your return.

As for the amount of profit needed to continue to have a Schedule C business, there is not a set number that is known to the public as far as what the IRS uses as a guideline.  A profit of $1 is still a profit.  Of course a higher number than $1 would show that you are having more success in running your business.  

You have not mentioned any amounts in your questions as far as your income or losses, but if the business loss is proportionally small compared to your other sources of income on your return, then do not fret over a small loss for a third year in a row.  Then see how 2025 goes and make your decision to switch to a hobby at that time.  

But, if the loss from the business is wiping out a large portion of your income from other sources, that is much more of a red flag to the IRS.

@terimac4 

[terimac4]

That was my other question. I receive a pension and my husband is getting Social Security. We have this small goods business as well as a side gig as an independent contractor in education. The loss from the goods was only $205 last year and the income from the side gig was $22000. So overall the businesses had a profit. I wasn't sure if they looked at each business profit and loss, or overall the businesses profit and loss. We are still hoping to grow the goods business and this year should be better.

[AnnetteB6]

Given the numbers you shared, keep working on your goods business.  That amount of loss is not significant enough to worry about given your other Schedule C business income.  Re-evaluate again next year when you're working on the 2025 tax return.  

@terimac4 

[terimac4]

Thank you! You have been very helpful!!