According to the IRS, if you are self-employed, your business income is the amount of your gross income less expenses. In determining earned income for purposes of the EIC, if you have a net loss from your self-employment activities (i.e., sole proprietorship or partnership interest), then you would reduce your earned income by the overall net loss.
Per IRS Publication 596 Earned Income Credit (EIC), on page 20:
CAUTION! When figuring your net earnings from self-employment, you must claim all your allowable business expenses.
Please note, although self-employment losses are taken into account in the calculation of the earned income credit, the IRS may disallow the loss in the business entirely which would remove the loss from both the return and the EIC calculation. This could occur if the business has not earned a profit in the appropriate number of years to be considered an actual business. This usually happens in a situation where the IRS feels the self-employment loss is basically being used to offset other income to make the return eligible for the EIC.
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