Filing business return (LLC, Schedule C) for a business with limited to no income in startup year

[Richard1024]

I recently had an inquiry from a referred client regarding a business startup in the equine business.  As it’s just in the startup phase with no meaningful revenue yet and it being about a month away from tax deadline, I wanted get some thoughts on whether it’s worth learning the business or referring to more experience.  The client obtained the LLC structure in mid-2022.  My research on this type of business indicate that it is very difficult to be profitable unless you diversify your revenue stream/offering of services (lessons, boarding, etc.).  The client currently works full time in an unrelated industry but would like to pursue the equine industry progressively over the next few years until the business takes off (progressively meaning more time within the industry while reducing time within the full-time work).

As there were limited to no income in 2022 and considering that the individual does not spend 100% of their time operating the LLC; I’m wondering should they even file a schedule C for the year in which they open the LLC.  They potentially do have expenses but I’m somewhat hesitant to file a schedule C which would show a loss for expenses and since this year is one and I’m not sure on the time frame when business may take off or the time that the individual will invest in the business as the year progress; this may end up being viewed as a hobby.  And also, if you don’t file a schedule C in the first year, potential startups costs deduction may be missed.  Based on discussions, the clients intent is to make it a profitable business while at the same time maintaining the LLC structure (liability protection) and avoid dissolution of the business LLC due to lack of business use.  I’m thinking for 2022, to just file with minimal to income or expenses and see what happens in 2023 as the business develops?

[IRonMaN]

Minimal income equals income greater than zero which means a schedule C should be filed.  But you sound hesitant to put your toes in the water so why don’t you refer the client elsewhere.  Why horse around with a business you aren’t comfortable with?

[Terry53029]

The IRS rule for sole  proprietor is $400, but I would leave it up to client. As far as referring client to someone more experienced, to me would depend on how old you are ( I would not take on a new business to learn), but if your younger why not as long as you don't do a disservice to client

[sjrcpa]

$400 is when SE tax kicks in. It has nothing to do with whether a Schedule C should be filed.

[TaxGuyBill]

In MANY cases, "horse" equals "hobby".

So if you decide to take this client, you should be sure to document as much as possible that it is a business and not a hobby (and advise the client to take actions that would qualify it as a business).

https://www.journalofaccountancy.com/issues/2013/oct/20138370.html

[qbteachmt]

It's not just that it might be viewed as a hobby, but "equine" is notorious for being one of the "businesses" which caused all the "hobby or business" stuff to be created.

Horses are a cost center and suck money like a sponge. Your client might intend to make money, but the more they delve into trying to make that a business, the higher the expenses will go. You are going to need to learn about the livestock regulations, the care and feed for my own horses vs boarded horses,  the "of course that show trip for my daughter to ride hunter-jumper is part of business." Etc.

I would start by interviewing the customer, to see where they intend to take it: breeding, boarding, training, retail feed and tack, transport (I have a friend that makes lots of $$$ hauling horses to events for owners), and will help be hired, or boarders who work there get credits, or school girls who want free riding lessons (risk management issues). That will tell you if you have a future with this client, or it's just rainbow sparkles and unicorns in the sky.

[Richard1024]

Thank you all very much for the great answers.  From my initial conversations, it seems they were very concerned with the LLC structure and the liability protection that it affords as this might have been a potential issue prior to establishing the LLC.  Beyond that, their goal is to incorporate horse riding lessons, eventually investing in a pony for rides and at some point, buying and selling of horses which now transition onto the investment side.  There’s also agricultural tax credits that they would like to pursue, etc. 

From that initial conversation, it did sound like rainbow sparkles & unicorn for what they were planning especially if a majority of the individuals time is not spent developing the business, however that's likely how all business start (a hobby into a multi-million dollar enterprise).  I do plan to meet with them in the coming days for a more detailed conversation.  I am in my early 40’s, a cpa and a one man operation, however I am willing to learn but at the same time, wouldn’t want to provide a disservice, especially as it’s their first year, I would like to get them started on the right footing.  I will get more information on their plans especially in those future years and determine if this is something that I take on or refer.

[qbteachmt]

They are not getting around liability issues; especially if they intend to offer rides and lessons and board horses. It's unfortunate, but I assume this operation is in the US, so there it is.

It's not to dash anyone's hopes or dreams. It's to bring them back to reality for how to run that operation as a business, so that it is a business, and most times, they can't do it.

Good luck to them and you.