We have a trucking company - an LLC - and for the last three years, instead of claiming a profit on our tax returns, we gave the profit out as bonuses to the partners. So we've claimed very small losses (in the range of a couple thousand dollars) for the last 3 years. I've heard that if a business claims a loss 3 yrs in a row, the chance of being audited by the IRS skyrockets. Is that a realistic possibility or just a rumor? Also, is it better for us to show a small profit, or to give bonuses at the end of the year and claim a small loss?

ANSWER

The BIDaWIZ Team's Answer:

There is no clear relationship between claiming a loss for three years in a row and your audit risk increasing substantially. Having said that, it is possible that the IRS may begin to question your tax return should you report losses for three years or more. But, it certainly doesn't skyrocket your audit risk. Whether you provide a small profit and pay out partners in bonuses or not, is more of a financial decision than a tax one. From a financial perspective, you will want to consider the return on investment from distributing profits to shareholders versus reinvesting it in the current business.