I started a business in 2006, I had business expenses, but haven't sold anything . Can I defer my deductions?

Question

I started a business in 2006, I had business expenses, but haven't sold anything . Can I defer my deductions until the 2007 tax year when I will have business income? My business is a used car dealership. I have spent about $3,000 on supplies, training and other expenses. I have spent $4,000 on inventory (2 cars I purchased in Dec 2006). I haven't sold anything to count as business income in 2006. Can I take these deductions this year, or do I defer them for the 2007 tax year (If that is allowed)? [I'm refering to Federal Income Tax.]

Another question: I have a Fed EIN number for my business, I haven't yet filled for LLC, but will do this in the next week. Do I file 2 separate tax forms for my personal income and my business income?

Answer 1

Your business had a loss - it can offset other income you might have. You need an accountant

Answer 2

Income and expenses must be reported according to specific rules and generally, if you are a cash-basis taxpayer, in the year the event occurred. Certain expenses, are "start-up" expenses and can be deducted evenly over a 60-month period. Other items you mentioned, like inventory, are NOT expenses...yet. Inventory is not counted as an expenses UNTIL you sell the item.

As for your need to file 2 returns...you DON'T. All of your income and expense for 2006 will be on your personal return. Business income & expenses are reported on Schedule C.

You CAN'T use the LLC until it is LEGALLY formed by filing such registration with your state. A Federal EIN has NO LEGAL significance and is of no tax consequence by itself.

Based on what you have above, it looks like about $3000 was spent on startup expenses which you can choose to either deduct all at once in 2006 and have a $3000 loss that can be used against other taxable income, or you can deduct 1/60th of the $3000 for each month your business was actually OPEN for business.

The WealthBuilder
Enrolled Agent / Tax Specialist

Answer 3

If there is an inventory and inventory is necessary to clearly show income when the sale of merchandise is an income-producing factor, and you as the taxpayer must account for an inventory, the accrual method of accounting must be used. Under the accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. The purpose is to match income and related expense in the same year.

However, you may benefit also from filing in on your 2007 return using a single member LLC (schedule C) and deduct your expenses against income then. You may elect to amortize cost paid or incurred up to $5,000 of organizational costs and up to $5,000 of business start-up costs as a current deduction in the year the active trade or business begins.

Please do yourself a favor though and contact a tax professional in your area. A qualified EA can be found by visiting www.naea.org. Also check out the IRS website for useful guidelines and information on your topic of interest; www.irs.gov

*Note, the IRS will definately audit you if you prepare a Schedule C for your business in 2006 with no amounts as income and amounts in expenses. That is a Big RED Flag, it screams audit me.

Answer 4

If you own a business, you need to have your own tax advisor. I assume you have one. My quick response to yours is that you can always have business deducion for the expenses in which they incur for the business puporse only (not personal). If you incur a loss in 2006 (I assume you did), you can use what's called NOL (Net Operating Losses). You may carry NOL back two years or forward 20 years. If you, by any chance, paid business taxes (well not yet I assume) for 2006, you deserve a refund. But if you don't pay it yet, you can use the loss in 2006 to deduct your income in the future to reduce the tax. In my opinion, you better get some serious advice from professionals, rather than from this source (including myself). Anyway, my answer assumes that your business is located in the U.S. therefore it's taxable under U.S. law.

Answer 5

If you paid the expenses in 2006, then that's the only year you can take them for. If you put them on a credit card, that's considered paying at the time they went onto the card, not when you actually paid the credit card bill.

Answer 6

yes u do need 2 separates form.Good luck to yr business

Answer 7

See IRS schedule "C"