Yes, getting a business off the ground takes time, and the IRS recognizes this. In your first few months or year of operation you may not bring in any income. Even without income, you may be able to deduct your expenses, as long as you meet certain IRS guidelines. Your business loss can offset other income on your tax return and lower your overall tax bill. The test for being able to deduct your expenses is whether you are operating a true business and not practicing a hobby.
I wanted to ask something a little more specific about your answer: "In your first few months or year of operation you may not bring in any income."
I have been going at my side business as a videographer and acquiring skills and equipment for the last 2 years (2018-2019) and I thought most businesses reported losses as much as 5 years out in some cases. If I am still not making a profit but it is definitely not a hobby should I be concerned about the write-offs if I have all of my receipts? And, when is the turning point where a person/sole proprietor needs to let go and convert it to a hobby in the mind of the IRS?
There is a difference between not having a profit and making no income. I assume people have paid you for your service at some point in the last two years? I think the original questions was if you literally received no income during the year (No one paid for your goods or service) can you still take deductions for that business. A true business can go three of five years of losses until the IRS "might" reclassify you as a hobby at some point. I wouldn't be concerned until your 5+ years in. At that point you would want to consider continuing of making a go of a business regardless of what the IRS says if you are continually losing money (not taking depreciation into consideration).
If you are in business to make a profit and you behave that way, you should continue to claim business income and expenses regardless of how many years you show a loss.
According to the IRS:
"In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. A hobby activity is done mainly for recreation or pleasure. No one factor alone is decisive. You must generally consider these factors in determining whether an activity is a business engaged in making a profit:
How do you distinguish between a business and a hobby?
It is generally expected that a business will not show a profit in it's first three years of operation *IN GENERAL*. It just depends on what the business is. Depending on that, if you show a loss in the 4th year it may raise a few eyebrows. But nothing that you'll hear about. But in the 5th year (again, depending on what the business does) it will probably raise flags at the IRS that basically say, "lets make sure to check this return next year (year 6 of the business) and see if it shows a profit then."
I started a business in 2019. I have expenses, but no income yet. How do I claim deductions using TurboTax when I can't get past the first step claiming income?
When you get to the income section of the Sch C just skip it.
Thanks!
Okay. I did that. But it won't let me deduct for my home office without adding income. Is there a way around that?
You must have POSITIVE income on the Sch C to deduct the Office in Home expenses. Enter them and the unused portion will be carried forward. Review the Sch C and the worksheets to see the inner workings.
You can peek at only the Federal form 1040 and the summary of the state info by going here:
1) lower- Left side of the screen...click to the left side of the "Tax Tools" text selection.
2) then select "Tools"
3) then select "View Tax Summary" from the pop-up
4) then back to the left-side and "Preview 1040"
Then hit the "Back" on the left side to get back to your tax entries.
To view your entire return using the online editions (including the state) before you file, you will need to pay for your online account.
To pay the TurboTax online account fees by credit card, without completing the 2019 return at this time, click on Tax Tools >>> Tools and then Print Center. Then click on Print, save or preview this year's return. On the next page, to pay by credit card, click Continue. On the next screen it will ask if you want Audit Defense, if you do not want this option just click on the Continue button. The next screen will ask for all your credit card information so you can pay for the account.
What happens if you incurred business expenses but had no income (side gig) because covid shut down all your business opportunities? I am an AV consultant for medical conferences.
Hello,
I found the location for where to enter in the business expenses / deductions, but as I enter in the information, TurboTax does not adjust the amount owed/due (top left). It should adjust the amount owed / due based. As stated in this thread (discussion), a business does not need to have income to deduct expenses. Example, two jobs, one is w-2 the other is consulting (not w-2). The consulting was profitable last year, not this year ($0). There are (were) expenses related to consulting (marketing / meetings / promoting / travel). The expenses from this should reduce the w-2 income (owed /due) box based on expenses, but it does NOT. Why, even though there is no income from the business in 2021 (there was in 2020), the expenses should be deducted from the
w-2 income. Why does the TurboTax program not do this ????
Look at the actual Sch C form ... page 1 lines 29, 31 & 32
You can peek at only the Federal form 1040 and the summary of the state info by going here:
1) lower- Left side of the screen...click to the left side of the "Tax Tools" text selection.
2) then select "Tools"
3) then select "View Tax Summary" from the pop-up
4) then back to the left-side and "Preview 1040"
Then hit the "Back" on the left side to get back to your tax entries.
To view your entire return using the online editions (including the state) before you file, you will need to pay for your online account.
To pay the TurboTax online account fees by credit card, without completing the 2019 return at this time, click on Tax Tools >>> Tools and then Print Center. Then click on Print, save or preview this year's return. On the next page, to pay by credit card, click Continue. On the next screen it will ask if you want Audit Defense, if you do not want this option just click on the Continue button. The next screen will ask for all your credit card information so you can pay for the account.
And then look at the form 1040 lines 17, 20 & 23 and their correlating schedules ... where are your taxes coming from ? Even if your tax liability is zero on line 16 doesn't mean you still don't owe taxes of some kind. The expenses you mentioned can only reduce the amount on line 16.
I started a quilting business in 2021. I have one sale so far for $150. I purchased equipment, sewing supplies, fabric, etc. My question has to do with what items I can deduct as expenses. I have receipts for many of the items I purchased so I know those can be listed as expenses. What about the items I don't have receipts for like fabric and embroidery sewing machine that I purchased at an estate sale/yard sale. I paid $3000 for the machine and fabric but I don't have a receipt for it. Can I still claim these items?
Thanks, Linda
It’s not likely, unless you have some reasonable way to reconstruct your purchases or other expenses. Think credit card postings, bank statements, things like that.
The IRS requires that you keep adequate records or provide sufficient evidence to support your business expenses. If you don’t, you can’t claim the expenses.
However, you might find some helpful information in the TurboTax Blog A Guide for Self-Employed Filers that Haven’t Tracked Their Expenses This Year.
Hello!
Besides my day job, I've worked and filed my returns as an independent contractor (karaoke host/DJ) for nearly 20 years, making small but decent profits every year until 2020 when Covid closed the bars I had shows at, and the private party business came to a total standstill. I filed my 2020 taxes as usual (using Turbotax), but for the first time the expenses I had to report exceeded income, because I only made money through March that year.
Flash forward to today, as I work on filing my 2021 return. I had no self-employment income at all in 2021, although I hope to be back to work in just a couple more months. At least I'd get to save myself some work and only file a SIMPLE return for 2021 -- although I still had related expenses it didn't seem right claiming them against zero income.
Here's my conundrum: Turbotax is still insisting I enter my business expenses, even though I've already put in zero for my self-employment income. I went through the expenses menu I'd been hoping to avoid, just entering zeros or hitting return, but it's still showing the expenses questions as "unstarted". And it wants me to fill-in amounts on a 1099-misc for the last bar I worked (in 2020) even though I didn't work there in 2021, and have no current 1099-misc for that employer. And of course it wants me to switch to the more expensive filing plan for self-employed filers even though I'm trying to file a simple return.
Should I simply give in and claim my usual expenses (home office, mileage, advertising, supplies, etc, etc) even though I have NO income to report? Would that actually get me a larger refund? Is that even legal?
So much for having a "simple" tax filing this year.
No. You need to delete your Schedule C. You can begin anew once you have a business again. You can't take expenses, just to get around the software.
Thank you for the info. Only trouble now is I have a tax accountant, and several other pros in my line of work, telling me I really should report expenses and take the loss. That it is best to show/document the continuous operation of my business for going into the future despite no income for 2021. I've also heard the point that my business DID result in 2021 income, because that's the only reason I got unemployment comp income during 2021.
It seems to be a thin line between having very low (near zero) income in proportion to expenses in one year, and in having 0 (zero) income with all the similar expenses in the next year.
@KJman The key issue is whether you were open for business, meaning you were offering your goods or services for sale. If not, then your expenses are start-up expenses and you need to wait until the year you are open for business to deduct them. Otherwise, you can deduct expenses with no income, but this is an audit trigger as the IRS may demand evidence that you were open for business and were operating a legitimate business.
Yes, it does seem like a fine line...
My situation, my wife is a Psychologist and a School Psychologist. Most of her time is in the school where she gets a w-2. For the past few years, she has teamed up with another Psychologist to provide some testing services and received a 1099 and with her expenses, made a nice little profit. In 2020, she had 1099 income and expenses, but Covid reduced the activity. So she took a loss. Last year, 2021, she had no 1099 income, but still has minimal expenses, such as, liability insurance, professional licensing fees, etc. She intends to continue the business this year, even expanding it into clinical counseling. Can she still file a sole proprietor form with a loss and no 1099 income? Additionally, she is thinking of becoming an LLC in the future. Does that make any difference?
Yes, you can claim business expenses as long as it is related to business even though you had no income.
She will use Schedule C Profit or Loss from Business to report her income and expenses.
Follow these steps to enter your business information in TurboTax.
Click on the link for more information