can you write off business expenses without an llc [Guide]

Last updated : Aug 18, 2022

Can you write off business expenses as a sole proprietor?

Business expenses Every business has operating expenses, and a sole proprietorship is no different. As long as your expenses are "ordinary and necessary," in the parlance of the Internal Revenue Service, you can claim them on your tax return.

Can you write things off if you don't have a business?

Can I write off business expenses if I don't have an LLC or an S-Corp? Yes, even if you are filing as an individual, you can still write off business expenses. All businesses can deduct ordinary and necessary expenses from their revenue. The IRS will tax you as a sole proprietor if you are the only owner.

Can I write off business expenses on my personal taxes?

Office supplies, credit card processing fees, tax preparation fees, and repairs and maintenance for business property and equipment are also deductible. Still, other business expenses can be depreciated or amortized, meaning that you can deduct a small amount of the cost each year over several years.

Can I claim business expenses even if the business produced no income?

You can either deduct or amortize start-up expenses once your business begins rather than filing business taxes with no income. If you were actively engaged in your trade or business but didn't receive income, then you should file and claim your expenses.

Is it better to be a sole proprietor or LLC?

One of the key benefits of an LLC versus the sole proprietorship is that a member's liability is limited to the amount of their investment in the LLC. Therefore, a member is not personally liable for the debts of the LLC. A sole proprietor would be liable for the debts incurred by the business.

How much money do you have to make to be considered a business?

Unincorporated Businesses As a sole proprietor or independent contractor, anything you earn about and beyond $400 is considered taxable small business income, according to Fresh Books.

What Cannot be written off as a business expense?

Gifts: You can't deduct the entire cost of business gifts. But, you are allowed to deduct the first $25 worth of gifts to clients. Penalties or fines: You cannot write off the costs of any penalties or fines, even if these are incurred during business activities. This includes parking tickets and traffic tickets.

What expenses can a sole proprietor claim?

• Office Space. DO deduct for a designated home office if you don't also have another office you frequent.
• Banking and Insurance Fees.
• Transportation.
• Client Appreciation.
• Business Travel.
• Professional Development.

What are the 3 general rules for qualifying your home office as a business expense?

• it is your principal place of business.
• you use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients.

Can I claim business expenses without receipts?

The Cohan rule allows taxpayers to deduct business-related expenses even if the receipts have been lost or misplaced—so long as they are “reasonable and credible.” This ruling means that the IRS must allow business owners to deduct some business expenses, even if they don't have receipts for all of them.

When can you start writing off business expenses?

Generally, you should file business expense deductions with the rest of your taxes at the end of the fiscal year. File business tax write-offs the first year possible as you might lose them otherwise.

How much can you write-off for self-employed?

For 2021, the first $142,800 of net earnings is subject to the total self-employment tax. However, if you earn more than this amount, the remaining amount is subject to the 2.9% Medicare tax only. The IRS allows you to deduct 50% of your total self-employment tax on your tax return.

What happens if your business doesn't make money?

Even if a business doesn't make any money, if it has employees, it's legally obligated to pay Social Security, Medicare and federal unemployment taxes. Because the federal taxes are pay as you go, businesses are required to withhold federal income taxes from each check and declare and deposit the amount withheld.

What if my business expenses exceed my income?

If your business expense deductions for a year are more than your income for that you, you may have a net operating loss (NOL). The way you determine and deal with an NOL depends on your business type. You take a net operating loss on your personal tax return if you are: A sole proprietor.

How many years can you operate a business at a loss?

The IRS will only allow you to claim losses on your business for three out of five tax years. If you don't show that your business is starting to make a profit, then the IRS can prohibit you from claiming your business losses on your taxes.

What are the disadvantages of an LLC?

• Cost: An LLC usually costs more to form and maintain than a sole proprietorship or general partnership. States charge an initial formation fee.
• Transferable ownership. Ownership in an LLC is often harder to transfer than with a corporation.

What is the biggest advantage of a sole proprietorship and LLC?

Whether you decide to register your business as a sole proprietorship or an LLC will vary depending on your personal business goals and concerns. The single biggest advantage of an LLC over a sole proprietorship is personal liability protection.

Why is an LLC the best?

The main advantage to an LLC is in the name: limited liability protection. Owners' personal assets can be protected from business debts and lawsuits against the business when an owner uses an LLC to do business. An LLC can have one owner (known as a “member”) or many members.

Should I start an LLC before making money?

Is an LLC Necessary To Start a Business? You don't need to start an LLC when establishing your business. However, if you want to differentiate between your assets and the company, an LLC is the right way to go. You should start an LLC if you want to start a business and protect your personal assets.

Do I have to declare a small business?

You have to declare this income on your 2020/21 tax return and pay the tax on it by January 2022. If you use cash basis, you would have to declare this income in the tax year you got paid, which is 2021/22.

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welcome back in this video I'm answering a few questions that are related can I deduct business expenses even if I have no income can I deduct expenses on Schedule C from personal income can I deduct a business loss from personal income what if I had expenses the year before 2018 started my business in 2019 can I deduct those expenses this year to answer this question we're going to talk about primarily startup costs and organizational costs and I have a spreadsheet template I'm gonna show you so that you can see clearly how all of this works we'll also talk a little bit about a business versus a hobby and we'll get this all squared away for you really quickly if you're new here my name is Amanda you're watching the business finance coach where I simplify business all the technical stuff because I believe that the world needs what you have inside of you and what you want to create and these are just tools that can help you get there and I certainly hope to help you get there faster so if you're new here consider subscribing okay so the first question I want to address is can I deduct business expenses if I have no income so this is a great question and the easy answer is yes you can but there are some things that you should check first the first one that would come to my mind if someone was asking can I deduct expenses but I have no income is I would say has your business started yet so you have to choose the date your business starts and that what determines that is that you're ready to take sales you're actively soliciting sales and income from customers and clients even if you haven't gotten paid yet in that situation as long as you're open for business you can deduct your related business expenses you're just going to have a loss because you haven't earned anything yet so let me give you an example that's really easy to understand this if you think about a store and someone who's opening an in person location store downtown right they're gonna spend a lot of time and money planning that but until they actually open their doors for business physically open them right they're not their business hasn't started right because their doors aren't open if they're not selling products or services any other way then all of those costs up until the day that they open their store doors are startup costs once the doors are open even if they get no customers they can deduct all of their expenses from that point on but those expenses that happened prior to the doors opening those are called startup costs and or organizational costs and these are two categories that I'm going to show you how to calculate in my spreadsheet template from my small business school but first let's address a few other parts of this question so can you deduct these expenses if they were from the prior year so if they're from 2018 and then in 2019 you started your business and you just had those expenses as long as you started in 2019 then it would be absolutely correct to begin deducting those expenses and I'll talk about totaling them up in the worksheet here in one second the other thing I want to mention was the question of can I deduct business expenses from personal income so if we take a look at the form 1040 you can see where our business income from Schedule C comes from so on Schedule C we have our total business income minus our total business expenses equals net income or loss that net income or loss which it will be if you have no income in all expenses flows to the income section on form 1040 and it will offset your other types of income w-2 wages investment income or any other types of income in this section personal income but there are a few questions at the bottom of Schedule C that guide you as to whether you can you can actually deduct that or not now most people I talk to do qualify but you just want to consider they're called at risk rules and passive income rules so as long as you are the one actively working in the business and you're working a serious number of hours 500 per year and there's a bunch of other criteria I won't go into in this video but as long as you're actually working in the business and no one else has invested in your business then yes you would qualify to deduct your loss but I want to just say I see a lot of people online telling people oh tax loophole start a business and deduct your expenses from your other income well that is tax fraud and there's even criteria to look at your business to know whether it's really a business so going back to that example with a person opened a store downtown let's say that that store was actually like a hangout area where it was a restaurant but they didn't really want people to come in other than people they knew and or maybe it was some you know hobby that the person has like woodworking but they didn't really bring other people in to the place they were just gonna deduct their expenses from their hobby yeah not okay there's a bunch of criteria that goes through that but I have other videos where I've gone through Hobby vs. business you know if you have a business or a hobby is it a real business are you trying to make a profit you can only take a loss so many times before the IRS is going to audit you so don't just be deducting hobby losses that's not legitimate okay so that's covered all of our questions let's take a look at my template here and I'll show you what happens with all of those startup and organizational costs so I have an entire automated business spreadsheet template that that's part of my small business school and so you could be using that to record your expenses and it would look something like this section here and you could just down here add in each of your expenses and these are some examples I have here so you can see I categorize them based on this column here as startup cost this one was paid to upwork hired a contractor to make a logo for $4,000 and the date so be sure to keep all that type of information especially the business purpose now the difference between startup costs and organizational costs you can see our organizational cost here says LLC registration lawyer to write the operating agreement so or cost are related to forming the legal entity like an LLC or a corporation so it's only those specific costs that go under or cost everything else that's a normal business expense goes under startup costs okay and so this spreadsheet is set up where you would just keep entering your cost and enter all the details business expense and all that that's what you need for your records so they would all be listed here you could keep going as much as you need then up here it's summing the total amount of start-up costs and the total amount of organizational costs okay now the rule is a little complicated that's why I wanted to show you the worksheet as all things taxes are so in the first year you can deduct up to five thousand dollars of start-up costs and five thousand dollars of organizational costs and so that's why it's worth dividing them out but only if you spent more than five thousand dollars if you spent less than five thousand dollars don't even worry a

Thanks for your comment Guillermina Havermann, have a nice day.
- Mathilde Cracchiolo, Staff Member

hey there youtube so i wanted to do a quick video on what kind of expenses are tax deductible when you have an llc um so i wanted to make this video because i saw another video where somebody was giving people really really bad advice and saying oh if you want to deduct certain expenses that might otherwise be personal just open an llc run all the expenses through there and that's how you can get tax deductions for personal expenditures uh horrible advice that's called tax fraud the rules around deducting expenses apply to all taxpayers right so whether you have an llc that's taxed as a partnership or an s corp or you have a separate c corporation or you're just an individual and you don't even have a business entity you're just a sole proprietor the tax rules around what's deductible applies to everybody okay within certain within certain exceptions but for the most part it's a standard set of rules for for all taxpayers so the first issue is you know if you want to take tax deductions for expenses you have to have a business you can't just open an entity and then run run costs through there um expecting to get tax write-offs for them so the first issue is always you know whether you have an llc or not the question is are you actively engaged in a trade or business and if so you can deduct ordinary and necessary expenses in connection with that trader business right the expenses are deductible under section 162 of the code it's very important that the business be for-profit right it has to have a for-profit motive um and so the irs is very clear that look if you've got some type of operation where you're making a little money but it's a hobby the hobby loss rules apply right so if it's a hobby whether that's in an llc or not i've seen a lot of hobbies in llcs um because there's there's not that for-profit mode of push you're not actually running a business if it's a hobby you can deduct costs right that you incurred in making whatever product or service you were providing but you can't create a loss right so any hobby expenses can only be used to offset any hobby income you earned and then that's it whereas if you're running a trade or business you can basically deduct costs in excess of your revenue right if your business is running at a loss you can deduct those excess expenses so and again just to touch on personal expenses tax code is very clear personal expense under section 162 is not deductible okay where it gets a little tricky is when you have you know expenses that might be 50 50 or kind of a hybrid cost and the example i have down here is is travel expenses for business i see this abused so often and the irs absolutely loves to challenge this because they win almost every time everybody that is an entrepreneur and wants to travel for their business when really it's just a vacation they get caught up in just running all the expenses through not allocating a portion to the personal use and the irs wins they if you can't 100 substantiate that the principal purpose of the trip was for business um and you know you're only deducting the business portion then you're at risk for for an audit and a reversal of those costs the irs is going to hammer hammer you um the best thing to read up on to give more information on these is the irs publication 463 that does a pretty good job at outlaying examples on you know what can be deducted if there's kind of a hybrid component so if you do have a trip for business but then you stick around a couple days after for vacation how do you go about bifurcating those costs and deducting the business portion and then not deducting the personal portion you can still have the company pay for the personal portion of the of the trip right that's fine it's just when you do your taxes the personal portion is a non-deductible basically an m1 reversal right so if you're thinking about how let's say meals for example meals are only 50 deductible and so when you look at your k1 or your tax return you see the deduction for half the cost and then there's that permanent difference where it says look this is a non-deductible expense that's effectively what the reporting looks like if you have a personal portion of a trip being paid for by your company so i think that the takeaway here is be very careful when you are deducting costs inside a company you really want to make sure that they're they are for the business right it has to be ordinary and necessary right necessary being the key point there right it's got to be um principally incurred for to further the business um enterprise right if it's a holiday for an owner uh that's it's going to be tough to argue that that's an ordinary necessary cost and furtherance of the business enterprise itself so um so that that covers it if you have any questions uh feel free to leave me a comment below happy to answer them and um and like always you know definitely appreciate a like on the video subscribe to the channel if you aren't already and i hope to see you again soon thank you

Thanks Buster your participation is very much appreciated
- Mathilde Cracchiolo

About the author

Mathilde Cracchiolo

I've studied differential topology at Claremont McKenna College in Claremont and I am an expert in aerobiology. I usually feel calm. My previous job was patent agent I held this position for 30 years, I love talking about backgammon and astrology. Huge fan of Barack Obama I practice modern pentathlon and collect military items.