Thank you so much! I am the only person in this business. (So I guess I may have to file Single Member LLC).
I have a small follow-up question to clarify my understanding: Do I need to file or Single member LLC or submit any documentation at all if I want to submit losses and expenses to save on taxes if I don't have any profit by end of the year? Or can I claim those without having any LLC or any other documentation to formally declare my business? Thanks again.
Whether you form a single-member LLC or not is up to you - this is a legal issue. from a tax standpoint, there is no difference in federal taxation. a single-member LLC is for federal purposes a disregarded entity so you file Schedule C as you would as a sole proprietor. it's included with your 1040. LLCs are state law entities so you need to apply for it. there are websites where you can do this or use a lawyer who can discuss the pros and cons. using a lawyer or tax pro is highly advisable because there may be other issues - do you need to charge and collect sales or other taxes. if you do most likely you'll need to register with your state. sales taxes can be complicated especially if you sell to out-of-state customers.
expenses incurred before your business began are start-up costs which are not deductible until the year the business actually begins. there is also a tax law that can come into play if you have losses in multiple years.
it's IRC code section 183 that states
If the gross income derived from an activity for 3 or more of the taxable years in the period of 5 consecutive taxable years which ends with the taxable year exceeds the deductions attributable to such activity (determined without regard to whether or not such activity is engaged in for profit), then, unless the Secretary establishes to the contrary, such activity shall be presumed for purposes of this chapter for such taxable year to be an activity engaged in for profit.
put another way losses in 3 out of 5 consecutive years could result in the IRS disallowing the losses and instead treating you activity as a hobby. which means income would be taxable but many expenses would be disallowed
