Tax write-off.?

Question

I am a W-2 employee. If I want to start a side business and incur a loss at the end of the year, can I write off the loss? If allowed, how does the write off work?? And does it matter if it's a sole proprietorship or corporation?? Thanks

Answer 1

Yes you can write off the loss, but you will need to start making a profit for 3 out of 5 years or at least show that you are trying to make the business profitable, otherwise the irs can declare the business losses "hobby losses" and disallow them. As far as how does the write off work, you would report the business income and expenses on a Schedule C, which would flow over to page 1 of your 1040. And yes, it would matter if it's a sole proprietorship or a corporation. Sole Proprietorship would be a Schedule C business. Corporation could either be an S-corp, where the loss would flow to you through a K-1, and be reported on Schedule E, or could be a C-corp, where the income/expenses and profit/loss would remain with the corporation, and not give you any tax benefit.

Answer 2

You could write this off for a while. The IRS realizes that it takes a few years to get a business into profit territory.

A loss shows up as a negative line entry on line 12 of your Form 1040 tax return if you are a sole proprietor or line 17 if you're running an S-Corp or a partnership. You wouldn't want to form a C-Corp as that loss would not be reflected on your personal return.

Of course the IRS expects you to eventually start to turn a profit or abandon the business. If you show a loss year after year they are likely to determine that your business is actually a hobby and disallow any losses.

Answer 3

If you start a side business as a sole Proprietorship, you would file Sch. C. you report your gross income and deduct the expenses incurred to earn it.

Some equipment has to be depreciated (expensed over several years)

If your expenses exceed your income, you have a loss that is carried from Sch C to form 1040 as a negative number and reduces your income.

A C-corporation files its own tax return where the loss is reported. An S-Corp files an information return only. the profits and losses are passed through to the shareholders and reported on their personal return.

Answer 4

You can indeed have a side business as a regular W-2 employee. However, if this business is not legitimate and you are merely attempting to write off personal expenses under the guise of business, it won't take the IRS long to catch on to this ruse.

Many folks who formerly sold AmWay and attempted to write off such losses got unpleasant surprises when the letters from the IRS arrived in their mailboxes.

Answer 5

Your mileage, postage, costs of resume production, toll calls, lodging and travel for an out of town interview, are all deductible on Schedule A Miscellaneous Deductions, to the extent those deductions exceed 2% of your income. Interview outfit is not deductible.