Can I deduct the unpaid time I have spent in my self-employed business as an expense?

[logicnine]

My wife and I own a software business, we are the only employees (but sub work out sometimes).

The business makes money from many customers by selling our software. 

For the last 3 years, I have worked developing a new software for the business, but I have not been paid for any of that time (in the future it will sell and turn a profit in which I will be taxed on that income).

This year alone, my billable hours for this project are worth $367,500; in which I am spending my time, but not yet being paid.

Is this a considered a loss? Is my unpaid time considered an expense? Is this tax deductible?

[rjs]

Your time is not a business expense and is not deductible. Your "pay" is the profit that you eventually earn.

[logicnine]

Is my billable time that I will never get paid for a business expense? For example, a product that was in development for a year or two and discontinued? Are those hours a loss to the business?

[rjs]

It is not a business expense. You have a business expense when your business spends money. Your business has not spent any money for your time, so there is no business expense.

How is your business structured? Is the business a sole proprietorship, a single-member LLC, a multi-member LLC, a partnership, a qualified joint venture, an S corporation, or a C corporation? The reason I'm asking is to establish whether, for income tax purposes, the business is a separate entity. Does the business file its own Form 1065, 1120, or 1120S tax return, separate from your personal Form 1040 tax return, or do you report the business on a Schedule C included in your personal tax return?

[VolvoGirl]

If it is self employment or you are filing schedule C.....

Sole proprietors cannot take a withdrawal or salary and include it as an expense on their tax return. As a sole proprietor, you are not an employee of the business. You don't pay yourself or enter a salary or withdrawal for yourself. All the business income and expenses are your personal income and expenses in the first place. You just fill out a Schedule C. The net profit or loss is your income.  If you have a net profit of $400 or more on schedule C you will pay SE self employment tax on it in addition to your regular income tax. It's all included on your personal 1040 form.  

(And if you paid yourself and deducted it as an expense then you would have to include it as income on the same tax return so it would be a wash.)

See Schedule C instructions page C-10 right above line 30, Do not include….amounts paid to yourself

http://www.irs.gov/pub/irs-pdf/i1040sc.pdf

[Carl]

Can I deduct the unpaid time I have spent in my self-employed business as an expense?

Bottom line answer is no. With a sole proprietorship, single member LLC or Multi-member LLC, the owner(s) of such a business can not be an employee of that business. Your "time" is flat out not taxable. Therefore you flat out no way, no how can deduct it. Additionally, under no circumstances and with no exceptions will you issue yourself a W-2, 1099-MISC or any other type of tax reporting document.

[Carl]

I need to further reiterate one thing I said above.

Additionally, under no circumstances and with no exceptions will you issue yourself a W-2, 1099-MISC or any other type of tax reporting document.

The above applies if the business will be reported on SCH C as a part of your personal 1040 tax return with no exceptions. However, if this is a multi-member LLC that will file a 1065 Partnership Return, then the partnership will issue each owner/partner a K-1 that each owner partner will *require* before they can even start their personal 1040 tax return. Also take special note that a 1065 partnership return is due to the IRS on March 15th each year. After that, the late filing penalty is $200 per month, per owner/partner. So don't be late with this.