LLC expenses greater than income, how do I carry over any expenses to the next year?

[Spires34]

I started an LLC 8/5/21, and have only been incurring expenses so far. All my purchases have been after the 8/5/21 date. I have spent for example $10k and made $0 as income. When I type in these numbers it obviously doesn't show the IRS is paying me money back, it shows $0 on my refund. However if I made profit this year, lets say $10k, it would still show $0. 

So I don't know how to report this; I heard you can carry over expenses to offset future profits? Do I hold off on reporting these 2021 expenses? I wouldn't want to input them this year, as they aren't getting me any tax deductions.

[AliciaP1]

You should not report anything for 2021.  The expenses you pay before you earn any income should be lumped together into an intangible asset, Start-Up Costs.  The first year you receive income you can elect to take a $5,000 deduction then will amortize the remaining amount over 180 months.

Per the IRS:
Business start-up and organizational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized. For information about amortizing start-up and organizational costs, see chapter 8.

Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Organizational costs include the costs of creating a corporation or partnership.

See Business Start-up and Organizational Costs in Publication 535 for more information.

[Carl]

 The expenses you pay before you earn any income should be lumped together into an intangible asset, Start-Up Costs.

That's not "quite" accurate. Expenses incurred before your business is officially "Open for Business" are start-up expenses. Start up expenses are claimed in the first year the business is actually open for business. It does not matter in what tax year those start up expenses were incurred either.The amount you can actually claim/deduct in that first year is limited to $5,000 and can be further limited depending on the business income that first year. The remaining expenses are amortized and deducted over time; 15 years if I recall correctly.

For more information I suggest you see https://www.irs.gov/newsroom/heres-how-businesses-can-deduct-startup-costs-from-their-federal-taxes and follow any applicable links from there.

[Spires34]

Hey Alicia thanks for the reply but the question was more so about situations where expenses are higher than total income. How do these expenses "carry over" as I have heard from CPAs that I can just carry over additional expenses to offset future profits?

And to be exact, I actually incurred $5,012 of startup costs. These costs happened after LLC formation so they're not by definition startup costs (per turbo tax as I was going through that business startup section).

[VolvoGirl]

What kind of LLC is it?  Are you a Single Member LLC?  Is it a S corp.  or a multi member LLC?  If you are filing it on schedule C in your personal tax return you can show a Net Loss and it is deducted from your other income.  Some expenses, such as home office or section 179 depreciation can only be used to reduce your schedule C taxable income to zero, and not to create a loss. Excess deductions for these carry over to the next year. 

[Spires34]

@VolvoGirl its a formed LLC and just myself. I didn't want to mention this part because it takes away from the main question, but I also made side money as a 1099 contractor so these expenses does in fact help lower taxation in that sense. (since LLC is pass-thru). 

But that last part you said, yes that is my question. everyone says it "carries over" so what does that mean? Does turbo tax track how much additional expenses went past that zero income, and save it for next year? For example do I put a post-it note on my desk and hold it for next year with that number on it? I know not literally but just trying to hammer down my question here. not sure how carry over works. 

[Vanessa A]

Yes, it sounds like you understand.  For the expenses that cannot reduce your income below zero, you would "put it on a post it note for next year"  for the other expenses that create your loss, that will just decrease your other income. 

The amount that is carried over will reduce your income next year, again, just to zero and not below.  Once down to zero, it will continue to carry over. 

[Opus 17]

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@Spires34 wrote:

@VolvoGirl its a formed LLC and just myself. I didn't want to mention this part because it takes away from the main question, but I also made side money as a 1099 contractor so these expenses does in fact help lower taxation in that sense. (since LLC is pass-thru). 

But that last part you said, yes that is my question. everyone says it "carries over" so what does that mean? Does turbo tax trash how much additional expenses went past that zero income, and save it for next year? For example do I put a post-it note on my desk and hold it for next year with that number on it? I know not literally but just trying to hammer down my question here. not sure how carry over works. 

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No, you don't put your expenses on a post-it note.  You enter all income and expenses when they are paid.

If this is a single member LLC treated as a disregarded entity, reported on schedule C, and you have a loss for the year (expenses exceed your income), this loss offsets your other income for the year.  If the loss is greater than all your other income, you have a "net operating loss" which is carried back or forward, depending on certain rules.

If you have two separate businesses, you will file two schedule Cs, one listing this LLC, and the other listing your other side gig.  If you made $50,000 with the other side gig and lost $10,000 with the LLC, then you have $40,000 of net taxable income for the year.   You can't segregate your losses (pay income tax on $50,000 this year and carry the $10,000 loss forward.)

Because both your businesses are "disregarded entities", everything passes to you as the taxpayer, and everything is combined on your single form 1040 (with two schedule Cs but only one schedule SE).  Your losses from one business offset your income from the other business.  You can't segregate your losses.

[Opus 17]

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@Spires34 wrote:

But that last part you said, yes that is my question. everyone says it "carries over" so what does that mean? Does turbo tax trash how much additional expenses went past that zero income, and save it for next year? For example do I put a post-it note on my desk and hold it for next year with that number on it? I know not literally but just trying to hammer down my question here. not sure how carry over works. 

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Let me clarify.

If you are not engaged in business activities, then you have startup costs.  Startup costs are reported the first year you have ongoing business activities, and are in fact "saved on a post it note" until that time. 

If you are engaged in ongoing business activities but just haven't been paid yet, then you report your expenses as of the date you paid them.  You can't save them for the future on a post it note or anywhere else.  If you have a loss, it is treated as I described above.

If "everyone says" losses carry over, then everyone is wrong.  For disregarded entities, your losses offset your other income in the current year.  The only time you have a loss to carry forward is if you have a net operating loss -- where the loss from your business exceeds all your other taxable income.  In other words, if you made $20,000 in profit from business A, and lost $30,000 on business B, you would carry that $10,000 loss forward.  But to do that, you would need to enter all your income and expenses for all your business, let Turbotax calculate the NOL and prepare the correct additional form that is required.   (And you can't choose to pay tax on the $20,000 profit from business A and carry forward a $30,000 loss on business B.)

[Spires34]

@Opus 17 Yes thank you for the answer, but that is why I didn't want to mention my side 1099 work... because that is taking away from the question I can't seem to get answered. Lets pretend I had no other side work, and the scenario was $5,000 incurred in expenses and $1,000 income. Do i report only $1,000 in expenses, and not report the other $4k until the next year? 

[Spires34]

@Opus 17 Just now seeing your second 'let me clarify' post. Thanks! So I just continue along in turbo tax, and they will generate some additional section for me to fill out since I have had overall NOL?

[Opus 17]

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@Spires34 wrote:

@Opus 17 Just now seeing your second 'let me clarify' post. Thanks! So I just continue along in turbo tax, and they will generate some additional section for me to fill out since I have had overall NOL?

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If you do have an NOL, Turbotax will report it for you.

For each schedule C, list your 2021 income and your 2021 expenses (expenses actually paid in 2021).

If job A had $5000 in expenses and no income, that's a $5000 loss.  If job B had $2000 income and $1000 expenses, that's $1000 profit, and you have a $4000 NOL that will be carried forward to next year.

On the other hand, if job A had a $5000 loss and job B had a $6000 profit, then you have overall $1000 of taxable income for the year and no loss to carry forward.   

[GeorgeM777]

No, you will need to calculate your NOL and then enter into TurboTax.  Although, because your NOL occurred in 2021, you will carry it forward (the part of your loss you cannot use in 2021) to tax year 2022.  When preparing your 2022 tax return, you can go to Income & Expenses in TurboTax online.  Scroll down the page to Other Business Situations, and select Net Operating Loss/QBI Carryforward Loss.  

@Spires34

[Spires34]

Let me ask this in a different way. I get that I can carry over expenses. Goal is to figure out how to accomplish the task of carrying over expenses. Thanks all but just saying "carry over your NOL" or "you can carry forward each year until zero" doesn't answer the question. 

Under TT H&B I am currently at:

Business > Business Income & Expenses > Less Common Business Situations > Net Operating Loss/QBI Carryforward Loss. 

Here, it says 2020 Net Operating Loss (I had none from last year so none carries over). However I type in a number in this editable 2020 NOL carryover field, as an exercise, and the overall refund number does not change.

Question 1: If I am showing profit in 2021, and I type in a carryover NOL amount from 2020, shouldn't this immediately or sometime before filing 2021 taxes, decrease/offset taxable income and increase refund? Because when I input a number, nothing changed. This must be the place I "carry over my NOL" that people have been referring to. 

Question: Next year, will TT auto-calculate & populate this field for me if I have current year NOL?

[Opus 17]

Let me ask a couple people who actually use this function.

@Hal_Al 

@VolvoGirl 

@Critter-3 

@ee-ea