I started an online business in 2007 can the IRS deny my advertising deductions?

Question

I started an online business in 2007 but because of the economy had a loss every year till 2010. Can the IRS deny my advertising deductions because of the profit motive issue? If so It would bankrupt me because I did least 50k in advertising each year.

Answer 1

The goal of any business is to profit. Some businesses take longer than others to profit but the general rule that keeps people from getting the audit letter is the 3 out of 5 year profit test. If you find yourself falling out of this range and you don't believe that you can substantiate your reasonable expenses for the purpose of generating a profit you may want to eat some losses in order to show some profit. If a business continues to show a loss year after year the owner may be subject to prove to the IRS that it is in fact a business and not a hobby or at the very worst a tax deduction fraud.

Answer 2

The IRS can question whether you had a real business or a hobby.

If you spent $50K in advertising (and surely you have proof of these payments), I would argue this wasn't a hobby.

The IRS is going to want to see that you ran the business in a business like manner, took steps to try to improve revenues, etc.  The fact that the economy was bad and you lost money every year does not automatically make you loss.  You simply have to show it was reasonable to hope you'd make money.

Answer 3

As long as you can show you were treating it as a business and TRYING  to make it a profitable business, you should be ok.

Answer 4

Depends on if they were reasonable.  Slapping ads on your car and claiming your car will be denied and penalized