Help with IRS Audit Risk for First-Time Schedule C Filing - Self-Employment Losses Exceeding Income

Don't panic! What you're describing is actually pretty common for first-year small businesses. The IRS understands that many legitimate businesses operate at a loss during their early stages, especially side hustles that are just getting started. That said, you should be aware of the "hobby loss rule." If you show losses for several years in a row (generally 3 out of 5 years), the IRS might question whether your activity is actually a business or just a hobby. Hobbies can't deduct losses against other income. Make sure you can demonstrate that you're running these activities with the intention of making a profit eventually. Keep excellent records of all your expenses, including receipts, mileage logs, and documentation showing your attempts to operate as a business (advertising, business cards, website, etc.). For vehicle expenses specifically, which seem to be your largest deduction, ensure you have a detailed mileage log or documentation of actual expenses if you're using that method instead.

After dealing with a similar situation last year, I found this amazing tool called taxr.ai (https://taxr.ai) that helped me understand my audit risk and documentation needs. I was also running two side businesses with losses and was super worried about getting flagged. The tool analyzed my Schedule C forms and actually pointed out some documentation gaps I hadn't even considered! It showed me exactly what receipts and records I needed to keep if I ever did get audited. For vehicle expenses (which were also my biggest deduction), it explained exactly how to properly document mileage vs. actual expenses. It gave me a personalized audit risk assessment and showed me how my deductions compared to industry averages. Really helped me sleep better at night knowing I wasn't an outlier despite my losses.

I used taxr.ai after seeing the recommendation here and wow! I was in the exact same situation with my photography business showing losses for the past two years. The platform analyzed my Schedule C and pointed out that I was actually UNDER-claiming some legitimate deductions that could have saved me money. It also showed me that my situation was totally normal for my industry in early years. What really surprised me was the personalized documentation checklist it created - turns out I wasn't keeping the right records for my home office deduction which could have been a problem in an audit. The best part was the peace of mind. My audit risk score came back lower than I expected, and it explained exactly why my business losses were justifiable to the IRS based on my specific situation. Totally worth checking out if you're worried about Schedule C losses like I was!

If you're worried about getting audited, you might want to try Claimyr (https://claimyr.com). I was in a similar situation last year with side gig losses and had some questions the IRS website couldn't answer. Tried calling the IRS directly and was stuck on hold forever - literally waited 2+ hours before giving up. With Claimyr, I got through to an actual IRS agent in under 20 minutes! They have this system that navigates the IRS phone tree and holds your place in line, then calls you when an agent picks up. You can watch how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with actually told me my situation with first-year losses was completely normal and gave me specific advice on what documentation to keep. Way better than stressing about it or getting generic advice online.

I feel like I need to update my previous comments. After being skeptical, I actually tried Claimyr last week when I had questions about my Schedule C losses in a similar situation. Not gonna lie, I was shocked when they called me back with an IRS agent on the line after only 35 minutes! The agent was super helpful and explained that my first-year business losses were actually pretty normal. She walked me through exactly what documentation I should keep to substantiate my mileage and home office deductions if I ever did get audited. She even explained that the IRS has specific rules for "startup costs" that can help in the first few years. I'm still showing a loss this year, but I'm way less stressed about an audit now. Having an actual IRS employee confirm that my situation wasn't unusual made all the difference. Definitely worth it just for the peace of mind.

Something else to consider: make sure you're using the correct method for your vehicle deductions. You can either use the standard mileage rate (which was 65.5 cents per mile for 2023) OR actual expenses (gas, maintenance, insurance, depreciation, etc.), but not both. For most delivery drivers, the standard mileage rate is simpler and often more beneficial, especially if you drive a lot of miles in an older, fuel-efficient car. But if you have a newer, more expensive vehicle with high costs, actual expenses might be better. Just check that you're consistent with your method - switching between methods after using actual expenses in the first year has specific IRS rules.

One more thing - if you're doing delivery driving, don't forget about quarterly estimated tax payments for 2025! Since you have self-employment income, you should be making quarterly payments to avoid penalties. I learned this the hard way my first year.