can I still write off business expenses?

Question

My husband was intending to start a small side business this year fixing computers. We spent some money to get it going, but we never got around to actually building that business this year (we got too busy with our full time jobs and caring for our son). Thus, we have no income from it.

We might work on getting that business going next year. Since I've already spent some money to get that business going this year, will I still be able to write off those expenses even though there wasn't any income from that business? Or can/should I just wait till tax time in early 2009 to write those off (even though those purchases were made in 2007)?

Thanks in advance for your help.

Answer 1

You cannot take any deductions for 2007 because you were not in business. You may take some deductions when you file your tax return for 2008 if you begin your business in 2008.

Keep all your receipts and divide them into the correct categories. Not all expenses incurred before you begin your business are startup costs. Not all expenses can be automatically deducted, some have to be spread over several years. If you purchased equipment, be careful to figure the percentage of business and personal use. Also, you probably had some mileage, so keep track of that.

A good reference for you is the Instructions to Schedule C.

http://www.irs.gov/pub/irs-pdf/i1040sc.pdf

Answer 2

As a contractor you will be liable for self-employment taxes (15.3%) on top of the federal income tax you will owe. At $20,000 even if you have NO expenses, your taxes would be based on taxable income of $9,850. 20K - 1400 (1/2 SE tax adjustment) - 5350 (standard deduction) - 3400 (personal exemption). Self employment tax would be $2800 & income tax would be $1100. So, paying estimates of $3900 would be acceptable if you had no expenses, which is less than the $4000 - $4800 they suggested. You can make unequal estimated payments if you have reason to believe that your income will be different from quarter to quarter and will not incur a penalty. However, since we are almost halfway through the year, this might not be the way to go. In addition, that's not always the best course for self-employed individuals like you. What you might do is at the end of June, calculate what your net income (income - expense) is. Then you can double that number for an estimate for your annual income, figure the tax on that, and send in the final two estimates based on that figure. Or, using that tax figure, start to set aside the money to pay your taxes with when April 15th rolls around. Whichever way you figure it, your taxes shouldn't be more than $4,000 for this year at least, as long as you have some expenses. Hope this helps!

Answer 3

Steve is correct, but a little more should be added.

The tax courts have recognized that taxpayers suffer a loss when they attempt to enter a business, conduct several transactions, and then never open the business.

You have to be careful here, because only certain expenses can be considered deductible. If your husband purchased tools, they will be considered for personal use. If you purchased a business license, that's something you can only use for business, and that will be deductible. To be deductible, you must have conducted a bona fide BUSINESS transaction.

Answer 4

Expenses are not deductible unless the active conduct of the trade or business has begun. The beginning point of the business is often considered to be the point when income is first earned.

The expenses you incurred are referred to as "start-up costs". The IRS allows you to deduct the first $5,000 of start-up costs in the year the active conduct of the business begins (an election must be attached to the return in the year the expenses are deducted). Any start-up expenses in excess of $5,000 can be deducted evenly over the next 15 years (this is referred to as amortization). Thus, if the business earns income in 2008, you should report the income and deduct the start-up costs already incurred (up to $5,000)...a simple election statement should be attached to the 2008 return.

Answer 5

Will your business be filing taxes? If so, then yes. If you will not be turning in a tax statement for your business....you would have no place to claim the expenses.

Answer 6

If they were bonafide business expenses, you can write them off.