Can Schedule C Business Losses From Startup Costs Be Deducted Against W2 Income?

Yes, you can generally deduct legitimate business startup costs on Schedule C even if your business doesn't generate revenue in the first year. These losses will flow to Schedule 1 and can offset your W2 income, potentially reducing your overall tax liability. For the computer equipment specifically, you have options. You can either deduct it all at once using Section 179 expensing (up to certain limits) or bonus depreciation, or depreciate it over several years. Just make sure you're actually "in business" - meaning you're actively working toward making a profit, not just setting things up as a hobby. Keep detailed records showing the equipment is exclusively for business use. The IRS tends to scrutinize business losses that offset W2 income, especially in the first year of operation.

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Just wanted to follow up - I decided to try taxr.ai after my earlier comment and wow, it was actually super helpful! I uploaded my tax docs from last year and explained my situation with starting a photography business while still working part-time. The breakdown it gave me about what qualifies as legitimate business expenses vs personal was incredibly detailed. It flagged that I needed to be careful about my home office deduction since I'm using the space partially for other activities too. Also helped me understand when I should be using Section 179 vs regular depreciation for my camera equipment. Definitely worth checking out if you're dealing with this W2/Schedule C situation!

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Don't forget about self-employment taxes! While you can offset your income tax with business losses, you won't have SE tax if you don't have net earnings. But then when your business becomes profitable you'll have to pay both income tax AND self-employment tax on those profits. Also check your state tax rules. Some states are less friendly about business loss deductions than federal. I live in California and they have their own special rules that limited how much of my business loss I could deduct.

Make sure you actually set up your business properly! Don't just start buying stuff and assume the IRS will see it as a business. Get an EIN, open a separate business bank account, maybe file for an LLC depending on your situation. I made the mistake of mixing personal and business expenses my first year and got audited. Total nightmare trying to prove what was actually for business vs personal. I'm not saying you need to incorporate right away but at minimum keep EVERYTHING separate.

One thing to keep in mind is the timing of when you can actually deduct these startup costs. The IRS distinguishes between true "startup costs" (like market research, legal fees to set up the business) and regular business expenses once you've begun operations. Equipment purchases like laptops are generally considered regular business expenses once you're actively in business, not startup costs. The good news is you can typically deduct equipment immediately under Section 179 or bonus depreciation rules, but make sure you're actually "in business" when you buy it - meaning you're actively pursuing clients and revenue. If you buy everything months before you start marketing your services, the IRS might question whether you were truly in business yet. Consider timing your equipment purchases closer to when you actually begin operating. Document everything showing you're actively working toward generating income!