Business Expense Reporting Explanation
I have been a tax preparer for several years and some IRS agents tell you that you have to declare some sort of income in order to declare business expenses on a Schedule C. It depends on a few factors really.
Schedule C's are the most audited tax return for various reason. Mainly because this is where people make a lot of mistakes and over or under report income and expenses.
But different business structures have different tax filing requirements. Regarding how to file business taxes with no income, you shouldn’t file if:
You weren’t actively engaged in a trade or business.
You were preparing to begin your business.
You can either deduct or amortize start-up expenses once your business begins rather than filing business taxes with no income. Filing at a loss every year just to save on taxes makes you look bad to lenders when trying to qualify for a business loan as most people found out by applying for PPP and EIDL Loans. No Income. No business. You haven't established your proof of concept yet.
On top of that, if you report a loss too many times, you will raise a flag and the IRS may decided to downgrade you to a hobby. Because let's face it, Who actually starts a business with the intentions of not making a profit?
A good tax preparer (with an accounting, finance, or business background) could help give you advisement on business operations to help make better decisions that can help you avoid repeated loss reporting, and set up your tax structure to minimize tax liability. Different Business structures get tax different ways and different reporting obligations:
Sole proprietorship; (no Income, no expense)- no filing. (no income, but expenses)- Maybe file
Partnership; (no income, No expenses) Must file information return. (No income, but expenses) -File
Corporation (C Corp and S Corp) ; you have to file whether you profit or have a loss.
If you didn't know already, LLC's are not governed by The IRS because these are State Entities. You have to choose which way you want your LLC to get taxed at the federal level or the IRS will default you to one of the above mentioned.
If your attempt to go into business is unsuccessful. If you are an individual an
d your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories.
Personal Expenses (not deductible) - any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility.
Capital Expenses (deductible) - the costs you had in your attempt to acquire or begin a specific business
The best way to know what your options are is to keep GOOD RECORDS. Not receipts in a grocery bag or shoebox. Records. You can find logs and spreadsheets on the Forms, Dos, and Tools tab on this website.
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