New business start up costs

[KShaver31]

Hi,

I started a laser engraving business in 2021.  It took a lot of set up and training through out the year on the machine and setting up a website.  We only had sales for 2021 that were around $600.  We had the payment of the machine (approx. $6k), inventory (approx. $15k), expenses to set up an online commerce business, advertising, normal business expenses.  The business was set up as an LLC, but my husband & I are the "owners".  We both work our full time jobs and work this on the side.  We were told if we didn't have much income, we would probably just include the income and expenses on our personal taxes (Schedule C).  We will have a very LARGE loss, obviously!  Does that create any issues?  We are taking nothing, obviously out of the company and when it does start making money, then we were told it might benefit us to file taxes for the business separately.

Another question is should or can you take all the start-up costs and the small revenue (that was earned in 4th qtr. only) and start the business for tax reasons in 2022?

[AmyC]

Start up costs before the business began all go into one bucket called start up costs. You can write off up to $5,000 and amortize the rest. This is a benefit to you as you will have those deductions to help offset your future income. Your business began when you had your first sale. So any expenses after the first sale, can go into the various expenses columns.

An LLC is not a tax identity. Please see Small Business and Self-Employed Tax Center. This will give you everything you need to know. As married owners, the state you live in can affect how your return is prepared, You may each do a sch C or you may qualify as a joint venture. If you made the S corp election, that is the one to use.

[KShaver31]

My husband & I file jointly and live in Idaho.  So would that qualify to use schedule C on our personal taxes?

Also, on the $5000 that can be written off, does it get written off of start up costs or put into individual buckets?  Can the expenses since the 1st sale be above the $5k and go into the individual expense accounts?

[AmyC]

Yes, Idaho is one of the community property states so you may qualify as a joint venture. See Election for Married Couples Unincorporated Businesses.

All expenses before a sale are" start up" costs.

Yes, Once a sale is made, then you start dividing up the expenses into the appropriate categories. This goes over the $5,000 start up costs. See About Schedule C (Form 1040), Profit or Loss from Business  IRS.

However, you may not be able to claim the full $5,000. From Sch C instructions, Part V:

Business start-up costs.

If your business began in 2021, you can elect to deduct up to $5,000 of certain business start-up costs. The $5,000 limit is reduced (but not below zero) by the amount by which your total start-up costs exceed $50,000. Your remaining start-up costs can be amortized over a 180-month period, beginning with the month the business began.

For details, see chapters 7 and 8 of Pub. 535. For amortization that begins in 2021, you must complete and attach Form 4562.