We’ve recently had a loss in our business. We’re not paying taxes attributable to business profits, so how can a MERP be an advantage? Also, a relative who is just starting a business expects no profit through the initial years – should they use a MERP? : FAQ/Blog/Solutions
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We’ve recently had a loss in our business. We’re not paying taxes attributable to business profits, so how can a MERP be an advantage? Also, a relative who is just starting a business expects no profit through the initial years – should they use a MERP?

by Tom Luker on 05/01/15

The MERP can still be useful, especially if there is other taxable income [earned or unearned] on the front of the 1040.

  • The business loss can then offset otherwise taxable income and maybe cause little or no income tax due on the entire 1040 tax return.
  • In some cases, a farm could qualify for Farmland Conservation Credits with the lower taxable business income.
  • A true “hobby” business does not legitimately qualify for Sec 105 plan [that might be indicated by several years of very low GROSS revenues.] But if any business is really trying to make a profit, even several years of loss could possibly qualify.
  • One thing about a MERP or any fringe benefit: don’t just implement the plan in profitable years and then “un-implement” in loss years! The IRS takes a dim view of adjusting deductions like that to fit changing years of profit/loss.
  • As always, consult your tax/legal professional to determine what is best for you.

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