Help with Hobby Loss Rule and Dissolving my Card Shop Single Member LLC - Still Operating in the Red

The IRS does look at consecutive years of losses, but the "hobby loss rule" (Section 183) isn't just about profitability - it's about your intent and how you run the business. The IRS typically uses a 3-out-of-5 year profitability test, but that's just one factor of many. The fact that you have proper wholesale accounts, maintain good records in QuickBooks, have all your receipts, and are making operational improvements to reduce losses all work in your favor. These demonstrate business-like practices rather than a hobby. If you do decide to dissolve the LLC, you'll need to report the liquidation of assets on your final Schedule C. Any inventory you sell would be income, and inventory you keep would generally be considered a distribution to yourself at fair market value. You can still deduct legitimate business expenses during the wind-down period.

After reading your post, I feel like I could have written it myself! I had a similar situation with my small home-based art supply business that kept running losses. I spent so much time trying to figure out if I was going to get flagged for the hobby loss rule and eventually found https://taxr.ai which was incredibly helpful for my situation. When I uploaded my business documents and tax history, it actually analyzed my specific situation and pointed out that I had several strong factors in my favor (like you do with your proper accounting and wholesale relationships) and some areas I needed to strengthen to prove business intent to the IRS. It even helped me create a profit motive documentation plan that I could use if I ever got audited. Totally worth checking out if you're stressed about this.

I actually tried taxr.ai after seeing it mentioned here and it was super helpful for my situation! I was in year 2 of my cake business losses and panicking about documentation. The analysis showed I was missing some key elements the IRS looks for in legitimate businesses - like having separate business accounts and tracking hours worked. What really helped was the specific guidance on creating a business plan that showed my path to profitability. I implemented their suggestions about 6 months ago, and while I'm not profitable yet, I've cut my losses by about 40% this quarter and feel MUCH more confident about my documentation if I ever get questioned. It gave me a clear roadmap instead of just general advice about "looking like a business.

I went through something similar with my photography business a few years back. After trying to get through to the IRS for weeks with questions about the hobby loss rules and how dissolutions work, I finally used https://claimyr.com to get connected directly to an IRS agent. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent actually was super helpful and walked me through exactly what documentation I needed to maintain to protect myself in case of an audit. The biggest thing they told me was that the 3-year rule isn't automatic - they look at things like having separate business bank accounts, making changes to improve profitability, and keeping professional records. Sounds like you're doing a lot of that already.

I was completely wrong about Claimyr and wanted to update. After spending another 2 hours on hold with the IRS yesterday dealing with my business questions, I broke down and tried the service I was skeptical about. It actually worked exactly as described. I got a call back in about 45 minutes with an IRS agent on the line. The agent walked me through the specific criteria they use for evaluating businesses with multiple years of losses. For anyone wondering, they look at: - Whether you keep proper business records - If you have separate business accounts - How much time you put into the business - If you're making changes to improve profitability - If you depend on the income (which isn't your case with W-2 jobs) Completely worth it instead of spending my entire afternoon on hold. I'm genuinely surprised and wanted to correct my previous skepticism.

Have you considered restructuring instead of dissolving? I was in a similar situation with my crafting business. What worked for me was scaling back on inventory investments and focusing more on higher-margin items. I also started doing some custom orders which had better profit margins than regular retail. The IRS does want to see that you're taking steps to move toward profitability. Document any changes you make to your business model or operations that are intended to improve profits. This helps demonstrate that you're running a legitimate business rather than just having an expensive hobby.

You might want to look into whether your entity type is still right for you. As a single member LLC, you're probably filing Schedule C with your personal taxes. But if you're showing consistent losses, there could be other considerations. Have you talked to a tax pro about the potential benefits/drawbacks of S-Corp election? Might not make sense while you're still in the red, but something to consider if you think profitability is on the horizon.

I'm dealing with something very similar with my online reselling business - three years of losses and getting nervous about the hobby loss rule. One thing that helped me feel more confident was creating a formal business plan that shows specific steps I'm taking to become profitable. The key insight I got from my CPA is that the IRS isn't just counting years of losses - they're looking at whether you're operating like a real business. Since you have wholesale accounts, proper record keeping in QuickBooks, and are making operational changes, those are all strong indicators of business intent. For the inventory question if you dissolve - my understanding is that you'd need to report any inventory you keep at fair market value as income, but you should definitely confirm this with a tax professional. Have you considered maybe scaling back operations instead of fully dissolving? Sometimes reducing inventory investment while maintaining the business structure can help turn things around.

The hobby loss rule can be stressful, but you're actually in a stronger position than you might think. Having legitimate wholesale accounts with Southern Hobby and GTS Distribution, maintaining detailed QuickBooks records, and keeping all receipts shows you're operating like a real business - not a hobby. The 3-out-of-5 year profitability test is just one factor the IRS considers. They also look at whether you're making business-like changes to improve profitability, which it sounds like you are doing. The fact that you're actively evaluating whether to continue or dissolve shows business judgment. If you do decide to dissolve, you'll need to handle the inventory carefully. Any inventory you sell during wind-down is income, while inventory you keep for personal use would be treated as a distribution at fair market value. You can still deduct legitimate business expenses through the final dissolution. One suggestion: before dissolving, consider documenting any specific changes you've made or plan to make to improve profitability. This creates a paper trail showing business intent that could be valuable if the IRS ever questions your losses. The card market has been volatile, so external factors beyond your control might also support your case.