Can losses from my new small business offset my W-2 income for taxes?

Thanks for explaining! So just to make sure I understand correctly - I'll fill out Schedule C for my business, which will show my $8,300 loss. That loss will reduce my total income from $62,000 to $53,700. And THEN I still get to take the standard deduction of $13,850 (for single filers in 2023), which would bring my taxable income down to $39,850? That sounds much better than I thought! Do I need to be concerned about any "hobby loss" rules since I'm not profitable yet?

That's exactly right! Your business loss reduces your income first, and then you still get your full standard deduction. So your taxable income calculation would be exactly as you described - down to $39,850 after both reductions. Regarding the hobby loss rules, that's a smart question to ask. The IRS might question business losses if they think your activity is more of a hobby than a business. The key difference is your profit motive. You should be able to demonstrate that you're running the business with the genuine intent to make a profit, even if you haven't yet. Document your business plan, marketing efforts, and how you're working to make the business profitable. Generally, the IRS presumes an activity is for-profit if it makes money in at least 3 out of 5 consecutive years, but even if you don't meet that test, you can still prove profit motive in other ways.

How exactly does this differ from regular tax software? I've used TurboTax for my business for years and it seems to handle Schedule C fine. Does this actually offer something better than the standard tax programs?

I'm intrigued but skeptical. Did it actually help you identify deductions or business expenses you would have missed otherwise? And what about state taxes - does it handle how business losses affect state returns too? My state has weird rules about business losses.

It's different from regular tax software because it's specifically designed for analyzing documents and transactions rather than just filling out forms. While TurboTax asks you questions, taxr.ai actually reviews your receipts, bank statements, and other financial documents to identify patterns and potential deductions you might miss. I actually did find deductions I would have missed! The biggest difference was how it categorized some of my expenses that were in a gray area. For example, I had some education costs related to my business that I wasn't sure were deductible, and it helped clarify which ones qualified as legitimate business expenses versus personal development. It also flagged some home office expenses I was calculating incorrectly. Regarding state taxes, yes, it handles state-specific rules too. It showed me exactly how my business losses would flow through to both federal and state returns.

Wait how does this even work? Is this some kind of priority line to the IRS or something? I've literally spent hours on hold just to get disconnected. If this actually works it would be a lifesaver.

This sounds like BS honestly. The IRS doesn't offer any "skip the line" service that I know of, and if they did it would probably cost hundreds. I've been filing business returns for years and just accepted that you can never get through to them. What's the catch with this service?

It's not a priority line - they use technology to navigate the IRS phone tree and wait on hold for you. When they reach a human agent, they call you and connect you directly. No magic involved, just automation that saves you from listening to hold music for hours. There's no catch to how it works - they essentially wait in the phone queue on your behalf. The difference is their system can handle hundreds of calls simultaneously, so they can keep dialing and navigating the IRS phone system while you go about your day. When I used it, I put in my number, told them what department I needed, and went back to work. About 35 minutes later my phone rang and I was talking to an actual IRS agent who answered all my questions about business loss deductions.

Would a business credit card statement be enough documentation or do you really need to keep all the individual receipts too? I'm terrible at keeping paper receipts but I do put all my business expenses on a dedicated card.

Credit card statements are a good start, but they're not enough by themselves. The IRS wants to see what specific items you purchased, not just where you spent money. A statement showing you spent $300 at Office Depot doesn't tell them whether you bought legitimate business supplies or personal items. I recommend using a receipt-scanning app that lets you capture receipts immediately and categorize them. For major purchases, keep the original receipts and any documentation that shows the business purpose. For example, if you buy a computer partially for business use, document what percentage is for business versus personal. This level of detail will save you if you're ever questioned, and it's much easier to do as you go rather than trying to reconstruct everything later.

Is this related to the passive activity loss rules? Or is this something different entirely? I always get confused about which losses can offset what types of income.

These are actually two separate limitations that work differently! The excess business loss limitation that Nia mentioned applies to all business losses, regardless of whether you're actively involved or not. It's a newer rule (started in 2018) that limits how much total business loss you can deduct against other income in a single year. Passive activity loss rules are different - they only apply if you're NOT materially participating in the business. If you're actively running your business (working in it regularly and making management decisions), then your losses are considered "active" and can generally offset your W-2 income without passive activity restrictions. For most small business owners who are actively involved in their business, the passive activity rules won't apply. But both limitations could theoretically affect someone depending on their situation and loss amounts.

This is exactly the breakdown I needed to see! So if I'm understanding correctly, that $1,600-2,000 tax savings basically means my business "loss" actually put money back in my pocket compared to if I hadn't started the business at all. That's pretty encouraging for someone just starting out. You mentioned consulting a tax professional for the first year - is this mainly to make sure I'm not missing any deductions, or are there other complications with Schedule C that I should be worried about? I'm trying to decide if it's worth the cost or if I can handle it with tax software.