LLC with Zero Income

[MSAL678]

I formed an online consulting services LLC in CT in June 2024. There were no sales or revenue in 2024. I had expenses of registration and costs for subscriptions, etc.

Do I need to file a Schedule C if I did not have any income from my LLC in 2024?

Do I get any credit for my expenses?

Will it be the same for State v Federal?

[AmyC]

If your LLC is filing a Sch C:

1. It isn't filed until you have income

2.  you will keep adding up expenses of "start up" until you have income. Then, you will add your bucket of "start up" expenses to your return. As long as your start up expenses are below  $50,000 you can write off up to $5,000 the first year and amortize the rest.

3. Yes, same for state to start with.

[Rockpowwer]

I had a similar situation but I stared the business as disregarded entity LLC a couple year back. It only had losses and expenses until 2024. I’ve always filed those expenses in my schedule C. Was that not correct ? Those expenses offset other incomes like from w2. 

[RobertB4444]

That was technically not correct.  But if you never got called on it then you got lucky and since you have income for this year you're good to go going forward.

@Rockpowwer 

[Rockpowwer]

Oh ok. That’s interesting. Does the amount of losses/expenses matter ? Let’s say the business had expenses above $50k in the first 2 years before seeing first small income in the 3rd year. Would you still file the first schedule c in the third year and not first year ? Reason I’m asking is because this is software business and like others it does not see income or profit for a long time. Startup costs are always more and could last years. 
thank you for your reply. Just curious and want to understand. 

[AmyC]

Yes, the business does not officially start until making money. Remember, to be a business, you have to be making money 3 out of 5 years. If you go over $50,000, there are different rules. The SBA has a great section,  Calculate your startup costs.

Notice in How does starting a business affect my taxes? that expenses reduce your taxable income.

Once you start making money, you will have to pay the Self-employment tax and need to make quarterly Estimated taxes or increase your withholding with your job.

Reference: Small Business and Self-Employed Tax Center | IRS

@Rockpowwer 

[Rockpowwer]

Is “making money” 3 out of 5 years means profit or any revenue ? Like even if there’s some revenue but net losses 3 out of 5 years. Will that still be considered a business ?

reason I’m confused is that in the first year of starting the business I’ve gone through the turbo tax questionnaire and it guided me and allowed me to add all expenses and startup cost and eventually resulted in lowering taxes due. So yes , just like in the guide you linked about How starting a business affects my taxes, it talks about telling turbo tax about my business and it will customize my experience. Which means guides you through entering expenses and relevant deductions. 

so maybe the type of business I told it about changes the situation ? Type of business is software development. 

[DawnC]

If your business claims a net loss for too many years, or fails to meet other requirements, the IRS may classify it as a hobby, which would prevent you from claiming a loss related to the business.  If the IRS classifies your business as a hobby, you'll have to prove that you had a valid profit motive if you want to claim those deductions.   See When the IRS Classifies your Business as a Hobby for more details.  

The type of business doesn't matter, but the timing and type of the expenditures do!  Your business starts when you are officially open for business, when you ''open the doors'' so to speak.   Start-up costs are incurred in the planning and development phase.   

• If you start a business, you can deduct the cost of items you purchase, like computers and desks, as well as organizational costs to get your business started such as legal and accounting fees.
• You typically would deduct start-up costs over multiple years rather than deduct their cost in the year they’re incurred.
• For property such as desks and computers, this process is called depreciation. For non-property expenditures such as legal fees, this process is called amortization.
• Start-up costs are typically incurred during the planning and development phase of your business. After that, they usually become operating expenses.

See Some costs don’t qualify as start-up expenses for information on operating costs and the timing of the costs.   From TurboTax Tips - Start Up Costs

Timing matters, too.   “Start-up costs are only deductible if your business does indeed start up, and they have to be incurred during the planning and development phase of your business. Otherwise, after that, they become operating expenses.”    The flip side to this is that even though your business isn’t operational yet when you incur start-up expenses, you can deduct them or begin to deduct them in your first year of business (after you are open for business).

[Rockpowwer]

Ok this makes sense. The conversation about putting the business on schedule C is not about when the business “opened its doors”.  From the above it sounded like it’s more about when the business I making the money not becoming operational. 
so that means I was correct to file it on schedule-c if in the first year I had startup costs as well as starting operations and already incurring operational costs. Even though there was no revenue at all in the first year, was I correct to put the expenses on schedule c? 

[RobertB4444]

No.  The first year you had any revenue - even if you lost money - was the first year that you should have used a schedule C.

@Rockpowwer 

[Rockpowwer]

got it. so for future reference and to make a final conclusion, does the below sound correct?

- say we start a business in 2025 this year and only have pre-launch startup costs

- at the end of 2025 the business opens and starts operating (this is software business that offers free software with options to pay and upgrade). we are now incurring marketing and operating expenses.
- no paying customers have subscribed in 2025, but we've had expenses to promote the software and operate it.
- we are now in 2026 and we've had the first customers pay and we have some small revenue, but the expenses are still larger. this is how all 2026 goes.

conclusion:

1) 2026 will be the first year to report this small business as a disregarded entity on owners Schedule-C with startup and operating expenses from 2025 and 2026. As well as revenue from 2026.

or

2) 2025 will be the first year to report it on Schedule-C with no revenue and only startup and operating costs.

[RobertB4444]

You'll use the first option and report in 2026.

@Rockpowwer 

[Mike9241]

has your business started? this usually requires some action to alert potential clients that your open. if not, even your startup expenses aren't currently deductible.  

[Rockpowwer]

yes the business started in the same year as startup costs incurred. started means operational and open to clients but there was no revenue. this is a software business that was fully operational and incurring operational and advertising expenses but the software was free for a while to attract customers and not have any walls to gets free customers that can later be charged. the customers started to pay 1-2years later. 
so the question is, can this sole-proprietor business be added to schedule-c in the first year of operations, with deductible expenses only, or not until 1-2 years later when first purchase was made by a customer that created the first revenue item?