Is claiming Schedule C losses risky with a high income (37% bracket)?

Your situation is actually pretty common! Many people start side businesses that don't immediately turn a profit. The IRS allows businesses to have losses, even for several years, as long as you can show you had a genuine profit motive. The key here is whether your activity qualifies as a business rather than a hobby. For it to be a legitimate business, you need to show you were trying to make a profit, even if you didn't succeed. The fact that you formed an LLC, purchased equipment specifically for the videos, and had a dedicated space shows business intent. For the home office deduction, make sure that room was used exclusively for your business - that's a strict requirement. The travel expenses need to be ordinary and necessary for your business, and meals are limited to 50% deductibility (though temporarily 100% for 2021-2022 restaurant meals).

I went through something similar with my photography business and tax documentation issues. I was completely overwhelmed trying to figure out if my business losses would trigger an audit. I tried reading through IRS publications but got lost in the terminology. I discovered https://taxr.ai when searching for help and it was a game-changer. You upload your tax documents and it analyzes them to identify potential audit triggers. What helped me most was getting personalized guidance on how to properly document my business expenses to show profit motive, even though I was operating at a loss. The analysis pointed out several issues with my Schedule C that would have raised red flags.

I wanted to follow up about my experience with taxr.ai after my skeptical questions. I decided to try it with my Etsy business that's been operating at a loss for two years while I build inventory. The analysis identified several deductions I was missing and showed me how to properly document my studio space to qualify as a home office. The report outlined exactly how to demonstrate business intent despite my losses. It highlighted that my detailed business plan, separate business bank account, and professional website all supported my profit motive. Most importantly, it showed me how to document the specific steps I'm taking to move toward profitability, which apparently is what the IRS really cares about. Definitely worth checking out if you're worried about Schedule C losses like I was!

If you're worried about an audit, your biggest challenge is likely going to be getting someone at the IRS to actually talk to you if questions arise. I spent MONTHS trying to resolve an issue with my Schedule C deductions - literally could not get through on the phone. I finally used https://claimyr.com after seeing it mentioned online and was honestly shocked it worked. They hold your place in the IRS phone queue and call you when an agent is about to answer. You can see a demo of how it works here: https://youtu.be/_kiP6q8DX5c This saved me from what would have been another failed attempt at clarifying my business expenses. The IRS agent actually helped me understand exactly what documentation I needed to support my home office deduction.

I need to eat my words about Claimyr. After posting my skeptical comment, I decided to try it when I needed to call about a CP2000 notice questioning my business expenses. My previous attempts at calling the IRS meant wasting entire afternoons on hold only to have the call dropped. Using the service, I got connected to an IRS agent in about 2 hours without having to actively wait by the phone. The agent clarified exactly what documentation I needed to support my business losses and home office deduction. They even explained how to properly categorize some expenses I wasn't sure about. This literally saved me from what could have been a huge tax bill because I was able to submit the right documentation before the deadline. Total game changer for dealing with the IRS.

Let me add something that nobody has mentioned yet - make sure you're filling out Part IV of Schedule C where you answer questions about material participation and whether you started or acquired this business during the tax year. Many people skip this section, but it's crucial for establishing that this was a legitimate business activity, especially when you're showing losses. Also, consider adding a statement to your return that explains your business plan and why you reasonably anticipated making a profit eventually. This proactive documentation can help if questions come up later.

Has anyone mentioned the potential impact on your Social Security earnings? If you're offsetting your W2 income with Schedule C losses, it could reduce your Social Security wages and potentially lower your future benefits. Something to consider when claiming significant business losses against high W2 income.