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

[BenBasil]

Hello everyone,

In my search for answers pertaining to this question, all I could find was the exact same response from just about every person, which does not answer the underlying question of: "how does a small business without any income receive a tax return or credit by deducting (in reality it's considered capitalizing) their start up costs, when there isn't any income to deduct the expenses against?". This was my main concern, and filing as a small business, aka claiming expenses, made zero sense to do until the year you actually make money. Here's the answer: even though your business has NOT made income yet, but you were required to purchase necessary items to "start-up", claiming these costs will result in a return or credit because they are being deducted against the income from your regular job.

I hope this helps and saves you the time and money I had to spend in order to answer this simple question.

[TaxStarMobile]

That's a bit misleading. I have been a tax preparer for several years and IRS agents tell you that you have to declare some sort of income in order to declare business expenses on a Schedule C. Different business structures have different tax filing requirements. 

Regarding how to file business taxes with no income, you shouldn’t file if:

• You weren’t actively engaged in a trade or business.
• You were preparing to begin your business.

You can either deduct or amortize start-up expenses once your business begins rather than filing business taxes with no income. 

This answer is too broad and not specific enough.

[TaxStarMobile]

That's a bit misleading. I have been a tax preparer for several years and IRS agents tell you that you have to declare some sort of income in order to declare business expenses on a Schedule C. Different business structures have different tax filing requirements. 

Regarding how to file business taxes with no income, you shouldn’t file if:

• You weren’t actively engaged in a trade or business.
• You were preparing to begin your business.

You can either deduct or amortize start-up expenses once your business begins rather than filing business taxes with no income. Filing at a loss every year just to save on taxes makes you look bad to lenders when trying to qualify for a business loan as most people found out with applying for PPP and EIDL Loans. No Income. No business. You haven't established your proof of concept yet.

A good tax preparer (with an accounting, finance, or business background) would help give you advisement on business operations to help make better decisions to that can help you avoid repeated loss reporting and set up your tax structure to minimize tax liability. 

Different Business structures get tax different ways:

• Sole proprietorship; (no Income, no expense)- no filing. (no income, but expenses)- Maybe file
• Partnership; (no income, No expenses) Don't have to file.  (No income, but expenses) -File
• Corporation (C Corp and S Corp) ; you have to file whether you profit or have a loss.

If your attempt to go into business is unsuccessful. If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories.

1. Personal Expenses (not deductible) - any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility.
2. Capital Expenses (deductible) - the costs you had in your attempt to acquire or begin a specific business

For further research

All about the Schedule C- https://www.irs.gov/publications/p334#en_US_2021_publink[phone number removed]

All about Business Expenses - https://www.irs.gov/pub/irs-pdf/p535.pdf

[Opus 17]

In brief,

You file your first schedule C in the year your business is active -- when you are actively engaged in ongoing business activities.  If you have startup expenses from years before the business was active, you list them in the first year the business is active.  Depending on the amount and type of expense, it might be fully deductible in year 1, or partly deductible in year 1 and partly amortized over 15 years.   Equipment is listed for depreciation when you place it in service, regardless of when you bought it.

If you have startup expenses in excess of revenue, you create a loss, which is deductible against your other taxable income (you can deduct a loss from a side job against wages from your main job, for example).   If your loss is more than all your other income, you have a net operating loss which you can carry forward to the next tax year. 

If you have startup expenses before you begin ongoing business activities, you can't deduct them.  You save them until your business becomes active and ongoing.  For example, if you are a freelance graphics designer and you buy supplies in November 2021, but you don't list your business on Upwork and start advertising for clients until January 2022, then you business activities started in 2022 and you list the supples on your 2022 return as startup expenses. 

[Mike9241]

if the business has started usually looked at as actively seeking customers, (examples include advertising your business or if you have a physical location a sign in the door - open for business), then the start-up costs are deductible/amortizable beginning with the date the business became active. no income is required. you can elect under reg 1.195-1(b) to capitalize start-up expenses but then they become non-deductible in future years 

https://www.law.cornell.edu/uscode/text/26/195   

reg 1.195-1(b) in part

A taxpayer may choose to forgo the deemed election by affirmatively electing (there has to be a statement to this effect included with the return) to capitalize its start-up expenditures on a timely filed Federal income tax return (including extensions) for the taxable year in which the active trade or business to which the expenditures relate begins. The election either to amortize start-up expenditures under section 195(b) or to capitalize start-up expenditures is irrevocable and applies to all start-up expenditures that are related to the active trade or business.

if you elect to capitalize - no future amortization is allowed. basically, you're stuck with the capitalized amount until the business terminates.

https://www.law.cornell.edu/cfr/text/26/1.195-1