Can I be self-employed and report business expenses if I have no income?
As usual, the answer to this question is "yes, but..." Having no income doesn't necessarily equate to not making a profit. That is, some years you may have no income at all, while other years you may have income, but not enough to cover your expenses. For the "yes" part of this answer, let's take a look at two possible scenarios:
Starting a business: The first year you are in business, it's quite likely that you may have startup expenses and no income, as you organize and get ready for customers. Even if you start your business in December, you can still deduct those startup expenses. As long as you have records to prove your expenses, and you can show that you have actually started your business and are getting ready for customers, you can take the loss as a deduction on your taxes. Use Schedule C to categorize the expenses and add the loss to your personal 1040. (Read more about "When does a business start?")
Having a bad year: There may be a year when you have little or no income. For example, you might have an illness that keeps you from working or you may have to focus on another job and forgo income from this business for part of the year. You still have expenses (phone and Internet costs, for example, or rent on an office). For these expenses to be deductible, you must show that you are attempting to get customers and make a profit. You can't just let your business go inactive and do nothing to get income and expect that the IRS will allow you to deduct those expenses.
Avoiding IRS audit scrutiny. The IRS expects that you may have an occasional bad year, but the IRS expects you to make money, in general, three of five years in business, and it looks at several factors in making a determination on whether you have a hobby, with no intention of making a profit, or a legitimate profit-making business. Read more about IRS guidelines for "Business or Hobby?" and "Avoiding the Hobby Loss Trap."
So, yes, you may have a time when you have no business income and you still want to deduct business expenses. Just make sure you keep excellent records of both your expenses and your costs and efforts to get income.
Read more about keeping good business records.
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