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Earned Income Credit for Self Employed Taxpayers

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Level 1

We received a notice for a taxpayer and are having a hard time finding the answer on the IRS website. Hoping someone here can help.

Background - married taxpayers, both self employed with 2 young children. Taxpayer has a sch c profit of $34,900 and spouse has a sch c loss of $2,500.  

Lacerte used the net of the profit from the taxpayer and loss from the spouse when figuring earned income and calculating the earned income credit.  The IRS notice is not allowing the spouse's loss when figuring their EIC and therefore they are receiving a smaller refund because their income is higher. 

Reading through the EIC worksheet and Publication 596, I can't find anything that says whether you can or can't combine a net profit and net loss when calculating earned income.  

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3 Replies 3
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Level 12

I haven't looked at the Code in regards to this yet, but Worksheet B in the Instructions definitely seems to indicate the loss needs to be factored in as Earned Income (as Lacerte did).

Lines 1 would show the profit, and Lines 2 shows the loss.  Both are used for calculating the Earned Income on Lines 4.

https://www.irs.gov/pub/irs-pdf/i1040gi.pdf#page=44

 

My first thought is to fill out the Worksheet B and submit that as a reply to the IRS notice.  But before you do that, you may want to double-check that is actually what the IRS is disallowing.

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Level 15
Level 15

I remember seeing one of those letters back in the early 2000's, they disallowed EIC because they only used the taxpayers Sch C profit and ignored the loss on the spouses Sch C.

I was only a front office person back then, my employer had prepared the return.  I feel like he did send a letter disagreeing with the changed refund, but for some reason it sits in the back of my head that they never did get IRS to agree and the clients missed out on the EIC....I dont think he pursued it too aggressively though, it wasnt a large amount.


♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪
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Level 10
Level 10

If you fill out the IRS worksheet "B" for self employed, it will net any loss from profit on more then one schedule C. In your case the net profit from husband will have the loss from wife's schedule deducted. see pub 596