expense for sole proprietorship with no income?

Question

Hi All,

I am thinking of starting a web business as sole proprietorship so that I can expense the development cost. However, I am not sure if that's possible if the business is not expecting to make any money the first 1.5 years. I am also not sure if I can expense the development cost if I am outsourcing that task to a foreign company in Ukraine.

The reason I chose sole proprietorship over LLC is because I want to avoid all the cost and paperwork before the company gets on track. Also, I read somewhere that I can then expense my personal income from my day job. Is that true and is it a good idea?

Please help!

so is it okay, the expense it toward outsourcing to a foreign business? Is a receipt enough to prove it?

Also, can I easily convert to LLC after the business takes off?

Answer 1

As a sole proprietorship you would report income and expenses from the web business on your tax return as a schedule C. And the losses from the business would be able to be offset against your W-2 income. You can either choose to expense the development cost or capitalize it and depreciate it. Also, you will need to be aware of "hobby loss" rules. 1.5 years to make a profit is fine with the IRS, it's only if you had losses year after year after year after....you get the picture, that you would have a problem. Then the IRS could declare that the business is only a hobby and your losses in it would be limited to your income in it. What the IRS says for a business, is that if it makes a profit for 3 out of 5 consecutive years than it is a business and not a hobby, and losses would then be allowed. And of course the IRS might not ever challenge the business even if it has continuing losses.

Answer 2

Start-up costs of up to $5000 can be expensed but you can not deduct anything until the company officially opens for business.

Answer 3

Here's your answer.

You can offset current income by past expenses. I'm a 2nd year accounting student.

When income is earned in the future, you can offset it with losses in the past. The limit is between 6 and 20 years, but this info is at office-supply-stores in their "learn to" books, like "small business accounting for dummies" or whatever.