Sole Proprietor Starting in 2023

[Luke G]

I intend to begin a videography/photography sole proprietorship in January of 2023. I have been obtaining the legal documentation as well as other start up considerations (bank account, insurance, etc.) In December of 2022. I had someone reach out and ask if I could film in December and I would receive payment in January. I understand that the income would be filed in the 2023 taxes, however, what about the deductions? Would I have to file in 2022 without income and only have the deduction of that one job?

Furthermore, am I REQUIRED to file if I had only expenses with no income as a sole proprietor or is it just strongly recommended for deduction purposes?

Extra question: If I place money into the bank account that I have been holding for the creation of the business do I have to file that in 2022 or is that not something that would count as an income. 

[Mike9241 · Accepted solution]

your business was opened in 2022. so yes you should file the loss for 2022. if you don't and take it in 2023 the IRS could audit you when 2022 is a closed year. disallow the loss for 2022 (wrong year) and since it is a closed year you'll never get any tax benefit from the loss. 

you must also consider start-up expenses for 2022. 

these are expenses incurred before you had your first customer. IRC SEC 195

these can be deducted in 2022 following these rules - the lesser of 

(I) the amount of start-up expenditures  or
(ii) $5,000, reduced (but not below zero) by the amount by which such start-up expenditures exceed $50,000, and

the remainder, if any,  is amortized over the 180-month period beginning with the month in which the business began

.

[Luke G]

Thanks for the response. My understanding then is, it’s a stupid idea to just not do it because I am losing out on tax benefits. However, it is not something I could get in trouble for if I was to never ask for the deductions/benefits.

im not saying I intend to not file if it’s not something I can get in trouble for I just want to clarify what is or is not a REQUIREMENT versus an allowable but stupid decision. 

Based on your response I would assume not filing in 2022 would be allowable but stupid. @Mike9241 

[Mike9241]

not at all stupid. you're following the tax laws in that they allow you to deduct business losses.  there is no requirement to take losses but if you do you have to take them in the correct year.  this rule applies to deductible expenses be it for business, medical, taxes, charity, capital losses, etc. the other important rule is that it has to be an activity engaged in for profit and not a hobby. it's quite common for new businesses to have losses in the first few years until a client base can be built up.  

[Luke G]

thanks again!