Schedule C loss after profitable years - will this trigger an IRS audit?
I need to give some context for my questions about my small business situation. I'm a web developer who has mainly earned W-2 income from my regular job. During 2022-2023, I did some freelance work for a colleague launching a startup. My Schedule C profit those years was tiny - less than 5% of my AGI, with business expenses only about 1% of my gross profit. It was really minimal side income with barely any expenses. I didn't even bother depreciating my personal laptop since it was already several years old and mostly for personal use, though I did claim a small memory upgrade (around $75). I stopped freelancing mid-2023 and didn't pick up any new clients for over a year since my full-time job kept me busy. Recently in 2024, I started thinking about getting back into freelance work because I had more free time and was worried about potential layoffs. In September, I attended a tech startup pitch weekend specifically to network for contract opportunities. It paid off - I landed a contract in late November after several weeks of discussions. In October, I purchased a new laptop (my old one was struggling with development tasks) in anticipation of this work and because there was a major sale. Here's my situation: I signed this contract at year-end and likely won't receive payment until next year when I deliver the project. So I'm looking at several thousand dollars in expenses with minimal revenue for 2024 (just a $125 gift card I got for helping at the pitch event). I understand I can report a Schedule C loss to reduce my 2024 taxable income and potentially use Section 179 to fully deduct the laptop (or some business percentage - I'm considering keeping my old laptop for personal stuff). My questions: 1. Will this pattern raise audit flags? I'm concerned because I showed profits for two years, then suddenly have little income but larger expenses. I'll probably be profitable again in 2025 like I was in 2022-2023. I don't think an audit would find anything wrong, especially once they see my 2025 Schedule C, but I wonder if I'd get flagged before filing next year. It's worth noting that a loss this year could be advantageous since my tax bracket is likely higher than next year due to some stock vesting that inflated my W-2 income. 2. For Schedule C Part IV (vehicle expenses), I kept a detailed paper log of my business trip mileage (586 miles total). However, I don't know my total personal/other miles for the year since I didn't track my odometer reading in January (didn't know I'd have business travel). I just want to claim the standard mileage rate for the documented business miles rather than figuring out actual costs or depreciation. 3. If I take Section 179 for my new laptop but end up not having any freelance work during the 5-year recapture period, what happens? Do I just pay tax on 1/5 of the expense amount for that year? Thanks for any guidance!
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Miguel Harvey
You've got a perfectly legitimate business situation here, though I understand your concerns. Let me address each question: For your audit risk question - having a loss year between profitable years is completely normal for small businesses and self-employed folks, especially when you're investing in equipment. What matters is that you have a genuine profit motive (which you clearly do) and are keeping good records. The pattern of profitable years, then investment year with losses, then back to profit is actually quite common. Document your business purpose for the laptop purchase and keep receipts for everything. For your mileage question - don't overthink this. The IRS only needs your business miles to calculate the standard mileage deduction. On Schedule C Part IV, you'll enter your 586 business miles, and can enter "Unknown" for the total miles since you didn't track from January 1. What's important is that you have that contemporaneous log for your business miles. That's your proof if questioned. Regarding Section 179 and recapture - if you stop doing business activities before the end of the recovery period, you may need to recapture some depreciation. Essentially, you'd report the unrecovered cost as ordinary income in the year you stop business use. But this only applies if your business use drops below 50% or you stop business activities entirely.
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Miguel Harvey
You've got a perfectly legitimate business situation here, though I understand your concerns. Let me address each question: For your audit risk question - having a loss year between profitable years is completely normal for small businesses and self-employed folks, especially when you're investing in equipment. What matters is that you have a genuine profit motive (which you clearly do) and are keeping good records. The pattern of profitable years, then investment year with losses, then back to profit is actually quite common. Document your business purpose for the laptop purchase and keep receipts for everything. For your mileage question - don't overthink this. The IRS only needs your business miles to calculate the standard mileage deduction. On Schedule C Part IV, you'll enter your 586 business miles, and can enter "Unknown" for the total miles since you didn't track from January 1. What's important is that you have that contemporaneous log for your business miles. That's your proof if questioned. Regarding Section 179 and recapture - if you stop doing business activities before the end of the recovery period, you may need to recapture some depreciation. Essentially, you'd report the unrecovered cost as ordinary income in the year you stop business use. But this only applies if your business use drops below 50
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Finnegan Gunn
•Thanks for the detailed response! I feel much better about the audit question knowing this pattern is common. I have receipts and documentation for everything, so that's covered. For the mileage, I'm glad I can just put "Unknown" for total miles. I was getting stressed about not having that full-year number but still wanting to claim my legitimate business miles that I did track carefully. On the Section 179 question - just to clarify, if I take the deduction this year but don't have any business income next year, would I need to recapture the entire amount or just a portion? I'm wondering if it's smarter to just depreciate normally rather than use Section 179 given the uncertainty.
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Miguel Harvey
•For your mileage, as long as you have that contemporaneous log with dates, destinations, and business purpose, you're in good shape. The IRS is primarily concerned with documentation of business miles, not your total annual driving. Regarding Section 179 recapture - if you stop using the laptop for business entirely, you'd recapture the remaining unrecovered cost based on where you are in the recovery period. For example, if you claimed $3,000 under Section 179 this year but had zero business use next year, you'd recapture 4/5 of the cost since you only used it for business for 1 year of the 5-year period. Given your uncertainty, regular depreciation might indeed be the safer approach - you'd claim a smaller deduction each year, but avoid potential recapture issues if your business activities fluctuate.
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Ashley Simian
When I had a similar situation with my consulting business, I discovered taxr.ai (https://taxr.ai) which literally saved me from hours of stressing about potential audit triggers. I also had years of profit followed by a year with significant business purchases and minimal income, and was worried about the IRS flagging my return. The tool analyzed my situation and showed me exactly how to document everything properly to minimize audit risk. It also gave me specific guidance on how to handle business equipment purchases when business use might fluctuate - super helpful for your laptop situation!
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Oliver Cheng
•How exactly does this taxr.ai thing work? Do you just upload your tax documents or what? I'm in a somewhat similar situation where I took a loss this year after buying equipment but I'm paranoid about getting audited.
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Taylor To
•I'm skeptical of these tax tools... did it actually help you avoid an audit or did it just tell you what you already knew? Seems like basic tax knowledge that you can have loss years in business.
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Ashley Simian
•You upload your tax documents and it uses AI to analyze your specific situation. It identified potential audit triggers I hadn't even considered and gave me customized documentation requirements for my situation. It's way more personalized than general advice. For your skepticism - it's not just about knowing you can have loss years, but understanding exactly how to document things correctly. The tool showed me specific ways to structure my deductions that actually reduced my audit risk score based on IRS patterns. It's not about avoiding legitimate taxes, but about presenting your legitimate expenses in a way that doesn't unnecessarily trigger scrutiny.
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Oliver Cheng
I just wanted to follow up about my experience with taxr.ai since I was asking about it earlier. I decided to try it with my Schedule C situation (similar to yours with equipment purchases creating a loss year), and it was surprisingly helpful. The analysis showed me that keeping my business laptop 100% for business rather than mixed use actually reduced my audit risk. Also gave me specific language to use in my documentation that addressed the exact concerns IRS auditors look for with home office equipment. Definitely worth checking out if you're concerned about the audit risk with your situation.
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Ella Cofer
If you're concerned about IRS scrutiny, you should know about Claimyr (https://claimyr.com). I was in a similar position last year - had equipment purchases creating a loss after profitable years. The IRS sent me a letter asking for more information about my business expenses, and I couldn't get through to anyone on the phone for weeks. Claimyr got me connected to an actual IRS agent in under 45 minutes instead of waiting on hold for hours or days. You can see how it works here: https://youtu.be/_kiP6q8DX5c. The agent walked me through exactly what documentation I needed to provide, and everything got resolved in one call.
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Kevin Bell
•How does this actually work? Is it some kind of paid call service? I've been trying to reach the IRS for 3 weeks about a Schedule C question and just get the "call back later" message every time.
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Taylor To
•This sounds too good to be true. The IRS phone system is notoriously impossible. Are you saying this service somehow jumps the queue? I find it hard to believe that's legit.
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Ella Cofer
•It's a service that uses an automated system to navigate the IRS phone tree and wait on hold for you. When they reach an agent, they call you and connect you directly. It's completely legitimate - they're just doing the waiting for you. It's not about "jumping the queue" - you still wait your fair turn, but their system does the waiting instead of you being stuck on hold for hours. My call was about 45 minutes in the queue, but I was only personally on the phone for about 15 minutes with the actual IRS agent. Saved me hours of hold music and frustration.
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Taylor To
I need to eat my words about Claimyr. After expressing skepticism here, I decided to try it since I've been struggling with my own Schedule C questions. Got connected to an IRS agent in 37 minutes when I'd previously wasted 3+ hours on multiple days trying myself. The agent confirmed that having a loss year due to equipment purchases between profitable years is totally normal and NOT an automatic audit trigger. They walked me through exactly how to document everything properly to avoid issues. Would have never gotten this clarity without being able to actually speak to someone. Sorry for doubting!
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Savannah Glover
One thing no one mentioned yet - make sure you have a clear business plan document that shows your profit motive. I had a Schedule C loss after profitable years when I invested in new equipment, and the IRS did send me a letter (not a full audit, just questions). Having a written business plan that showed my intent to grow my business and why the investment was necessary totally satisfied them. Also helped that I returned to profitability the following year, which sounds like your situation too.
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Finnegan Gunn
•That's great advice I hadn't considered. Would a copy of the contract I signed in November count as evidence of profit motive? Or should I actually write up a separate business plan document? And did you just wait until they asked for documentation, or did you include some kind of explanation with your original filing?
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Savannah Glover
•The contract is excellent evidence, but I'd still create a simple 1-2 page business plan. Include your target market, expected revenue, why the laptop was necessary for this specific contract, and your growth plans. Nothing fancy, just something that shows you're approaching this as a business, not a hobby. I didn't include anything with my original filing - that would've been too much. I just kept it ready in case of questions. For you, having the contract signed in 2024 but with revenue coming in 2025 provides a clear business reason for the expense timing. That's exactly the kind of documentation that helps demonstrate legitimate business intent versus trying to create artificial losses.
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Felix Grigori
Quick question - has anyone using TurboTax had issues reporting a Schedule C loss after profitable years? Mine kept giving me some "audit risk" warning when I entered my laptop as a Section 179 deduction. Not sure if it's just trying to scare me into buying their audit protection or if it's a legitimate concern.
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Felicity Bud
•I use TaxSlayer and had the same "audit risk" warning pop up when I had a similar situation. I think most tax software is programmed to flag sudden changes in deduction patterns. I ignored it and filed anyway - that was 2 years ago and no audit. From what I understand, these warnings are pretty generic and don't necessarily reflect your actual audit risk.
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