My friend suggested that I start my business now since I am spending a bundle for getting it started.?

Question

That way I can write off these expenses. She said there is a 3 year window to do this before the IRS steps in and flags you. Does anyone have any experience with this? This business involves photography, editing, video and so on.

Answer 1

The IRS defines a small business as "doing an activity with the intent to make a profit."

The "three year window" that your friend is referring to is this: If you lose money more than three out of five years, the IRS is going to question whether or not you're actually intending to make a profit. You can show three years of losses, but more than that, and you'll either want to shut your business down (maybe start a new one) or keep VERY meticulous records and demonstrate that you are, indeed, trying to make a profit at what you're doing.

Starting your own business gives you a way to "write off" a lot of things. However, unless you have another job that you're paying taxes on the salary, there's not really any point to "writing it off" because you'll already have a tax liability of zero. "Writing stuff off" just allows you to deduct whatever you "write off" from any income that you report to the IRS.

Good luck.

Answer 2

Technically you can be in business and lose money for three years before there is a red flag. Anything you buy for the business up to about 100k can be written off. However, if you have no income to write off the expenses against then that would be worthless. You also have the option of depreciating the items over a long period. That way, you can get the deduction over a long period of time where there is a continuous stream of income.