Mark Kohler explains that Schedule C business losses can offset rental income, dividends, and capital gains. But watch out: losses for more than two of the past five years may trigger an IRS audit and get reclassified as a hobby, disallowing the deductions.
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So John asks on YouTube if expenses could be written off against unearned income. Here's the short answer. Yes, indirectly. Should I give them a Reader's digest version of the technical answer? Do you guys want the technical? Should I throw it out there a little? Okay. All right, here is unearned income, everybody. So let's say this is your 1040. Oh, now look at what's unearned. We've got rental, right? We've got rental or interest, right? Good job, Michael. Good job. Answer. Perky investments. Yes. All of that stock growth, that's unearned income. Now everybody look at. This is tricky. You've got schedule D, that comes in and that is dividends or interest or capital gain. And then you've got so many complicated things here you've got rental properties that are on schedule E. So you got rentals. Now you're going to have expenses against rentals, but it's still considered unearned income. So here's the tricky answer. Let's say you have a schedule C and you have a loss. Let's say you were driving through Uber Eats and you got all sorts of write offs and you had a loss. Can I use that loss against my W2, against my dividends, against my capital gain, against my rentals? The answer is yes, you can take a schedule C loss and use it against any other income. But here's the risk. If you have too many losses and it's really, really high, the IRS is going to go, what the hell is this person got? Are they really dumb? Why do they have all these losses? And you might get audited. So we don't want to be too greedy. Also, if you have losses for more than two years, they may classify it as a hobby loss. So if you start your small business and let's say in 2020, you have a loss, all right, that's cool. Maybe five grand. And then in 2021, you have another loss and it's maybe eight to ten grand. Okay, cool. In 2022, you've got to show a profit. If you don't show a profit, the IRS is going to call it possibly a hobby. Now, that's not a guarantee, but you could get audited. So you can only show losses two years out of five. Then the IRS is really going to question you, John, you can have a loss in your schedule C that you can use against all your other income. But I don't want to do be greedy and do it for more than two years in a row.
