Can I claim business expenses even if the business produced no income?

[Critter-3]

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.  

[lindaloudraper]

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

[JohnW152]

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.

@lindaloudraper

[KJman]

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.

[ColeenD3]

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.

[KJman]

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.

[ThomasM125]

@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. 

[PychHelp]

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?

[LoganathanB]

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.

1. Open or continue your return
2. Search for schedule c and click the Jump to link in the search results.
3. Answer Yes to Did you have any self-employment income or expenses?
   • If you've already entered self-employment work and this is a new business select Add another line of work
4. Follow the onscreen instructions.

Click on the link for more information

Self-employment 

[Vetteguy]

If I remove the 'Home Office' deduction, will the software still work with 'No Income' (Skipping the income section as noted previously)for claiming the other business expenses (Supplies, License etc) I have listed?

[JulieS]

Yes, you can report no income, delete your home office and still deduct business expenses as long as you have an active business and you are trying to make income. @Vetteguy

[jhu1]

2020 began working with and paying for cosultant to develop new business concept, travel expenses related to finding commercial space to lease etc... didn't get open that year, but a lot of expenses.  2021, a whole lot more expenses from consultant, legal, financing, equipment etc, still not open in location... and only had a very small $100 income at end of year from off-site sale of our product, but close to $20k expenses.  Business is single member LLC so pass through to personal return.  I also have w2 income.

Is it an issue to write the expenses off on 2021 return?

Thanks!

[Shaun1979]

I started up my llc Home Inspection Company middle the year but  haven't made any income yet. I've spend over 120.00 on my work phone per month plus my tools cost about 1500.00 not to mention the extra stuff that I had to buy for my work truck plus my truck payment is 488.00 mo. I consulted with a Accountant and he said starting next year you'll be able to write off your expenses and also since it's out of your home a percentage of my rent. Curious why I couldn't write these expenses off this year. But you need to show you've made some sort of income to write all of those expenses off. Is this true? Thanks for your help 

[gordonashull]

I am doing a small woodworking business on the side and selling some products I make at my daughter's retail store. My gross income from is less than $1k.  My expenses have been much more but hard to separate from the cost of goods for the products, and the hobby of woodworking.  How do I input my COGS?

[Vanessa A]

You will need to determine what portion of the materials were used for business and which were used for hobbies.

For example, if you bought 4 sheets of luan board for $120, 20 2 x 4's at $75 and a bucket of screws for $40 and you built 4 items that were all the same, gave one to your brother as a gift and sold the other 3 in your daughters store, you would take $235 (120+75+40) and divide it by 4 ($58.75) then multiply it by 3 ($176.25) for the ones sold in the store.  You would then use $176.25 for the cost of goods sold.

Basically, you will need to allocate the materials to the project and deduct accordingly.