My husband and I started a new business in 2020 just when the COVID pandemic hit. Since then we have nothing to report on our taxes for the business. How long are we able to prolong filing taxes for the business and are we able to write off any losses? We took out a home equity loan to start this business and have paid interest on it for 3 years. Also, we withdrew funds from an IRA account to pay off $30K of the loan. How will this impact our taxes? Thank you for your advice!
There is not a lot of information about the business or why you are prolonging filing taxes.
As a cash basis taxpayer, you must report income and expenses in the year that income is received and expenses are paid. Therefore, expenses paid in 2020 would be reported on the 2020 tax return. If you have no income and are reporting expenses, the IRS may question if you are actively pursing the sales and income or are just writing off losses with no intention of making a profit (hobby losses).
Withdrawal of funds from an IRA to payoff a loan would have no effect on the business expenses. However, there may be income due to income from the IRA distribution. With regard to the home equity loan, there would need to be more information about if these funds were used to pay business expenses, purchase business assets, etc.
Thank you for your reply. We have had no income to report for the three year period since starting the business. My question is how long can we wait to report income, when we do start receiving it and also report the losses at the same time? The entire amount of the Home Equity Loan was used for business expenses (startup, advertising, etc.). Is there a 5 or 7 year period to claim these business expenses, losses, etc? Thanks again for your advice!