How to deduct business expenses for a new company with no income yet?

My wife started her own marketing consultancy last year and has an agreement with a larger marketing firm, but she didn't generate any revenue in the first year. She's invested quite a bit in business expenses though - client meetings, some equipment purchases, and set up a dedicated home office space. The thing is, she was still working her regular job at an advertising agency during this time, so she had W-2 income from that employer. I'm confused about how to handle this on our taxes (we're filing jointly). Since her business didn't make any money yet, can we still deduct all those startup expenses? Or do we lose the deduction this year and have to wait until her business actually brings in money next year? Seems unfair to not get any tax benefit from real business expenses just because the timing of income is delayed. Anyone dealt with this before? Our tax situation is pretty straightforward otherwise.

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19 comments

Noland Curtis

You can absolutely deduct those business expenses even with no income! What you're describing is a business loss, and it's completely legitimate to claim it on your tax return. This happens all the time with new businesses. You'll need to file Schedule C to report the business expenses, even with $0 income. The resulting loss will offset your other income (including your wife's W-2 earnings), which will lower your overall tax liability. It's actually one of the few silver linings of a business not making money in its first year! Just make sure your wife's business is truly a business and not a hobby - the IRS looks at whether there's a profit motive. Since she has a contract with another company and is clearly setting up for future income, you should be fine. Keep good records of all expenses and how they relate to the business.

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Noland Curtis

Yes, that's an important distinction. The IRS generally expects a business to show a profit in at least 3 out of 5 consecutive years (2 out of 7 for horse-related businesses) to avoid being classified as a hobby. This doesn't mean a business can't have a loss in its first year or even multiple years, especially during startup. The key is demonstrating a clear profit motive through business plans, marketing efforts, professional arrangements (like your wife's contract with the larger company), and business-like operations. Document everything that shows she's attempting to make a profit, not just pursuing an activity she enjoys.

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Vanessa Figueroa

Had the exact same situation when I started my consulting business! I found using https://taxr.ai really helpful for figuring out what business expenses were legitimate to claim even with zero income. I scanned all my receipts and business documents, and it analyzed everything and categorized each expense correctly. The tool basically confirmed what the previous commenter said - you definitely CAN deduct those expenses against your other income. It also helped me understand which home office expenses were truly deductible (has to be exclusive business use of the space) and which meal expenses qualified (50% deductible if they're legitimate business meetings).

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Vanessa Figueroa

It does both - it organizes everything but also provides specific guidance based on tax rules. For your Etsy situation, it would help identify which supplies and costs are business expenses versus personal crafting expenses. It actually has a pretty detailed questionnaire about your business activities that helps determine if you're likely to pass the hobby vs. business test. It asks about business plans, marketing efforts, expertise in the field, and history of profitability in similar activities - all the factors the IRS considers when making that determination.

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Sadie Benitez

I was really skeptical about using another tax tool since TurboTax always confused me on business expenses, but I tried https://taxr.ai after seeing it mentioned here. Total game changer for my situation. It walked me through all the questions about my business vs. hobby activities and gave clear guidance on what I could legitimately deduct. What surprised me was how it identified several startup expenses I didn't realize I could capitalize and amortize over time rather than deduct immediately. This actually ended up being better for my specific situation. And yes, my first-year business loss was fully deductible against my other income!

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Drew Hathaway

If you're having trouble getting answers from the IRS about your specific situation, try https://claimyr.com - I was on hold forever trying to ask about deducting startup expenses with no income and getting nowhere. The service got me through to an actual IRS representative in about 15 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed that yes, you absolutely can deduct legitimate business expenses even when you have zero income in the first year. She also explained that I needed to be careful about separating startup costs (which are amortized over 15 years, though you can deduct the first $5,000 immediately) from regular operating expenses. Really helpful to get official clarification.

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Drew Hathaway

It uses an algorithm that navigates the IRS phone tree and waits on hold for you. When it reaches a representative, it calls you and connects you directly. It's not magic - just technology that waits on hold so you don't have to. The service runs through the same phone system everyone else uses, but it's automated and persistent. It keeps trying different options and timing until it gets through. Much better than me personally sitting on hold for hours during work hours.

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Isabel Vega

OK I'm eating my words here. After being super skeptical, I tried https://claimyr.com yesterday out of desperation. I've been trying to get through to the IRS for WEEKS about my startup business expenses. Got connected to an agent in about 20 minutes. The agent confirmed that I can absolutely deduct my legitimate business expenses against other income, even with no revenue from the business yet. She also explained that I need to be prepared to prove my profit motive if questioned - things like business plans, marketing materials, professional consultations, etc. Best $20 I've spent in a long time (way cheaper than my accountant who kept telling me to "just try calling the IRS again").

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Dominique Adams

Don't forget about Section 195 startup expenses! The tax code lets you deduct up to $5,000 of startup costs in the first year (with some limitations if your costs exceed $50,000). These are expenses you incur before your business is actually "in business." Then there are Section 179 deductions for equipment - you can write off up to $1,080,000 in 2023 for qualifying equipment purchases. The home office deduction is also available, but as others mentioned, the space must be used EXCLUSIVELY for business.

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Dominique Adams

The IRS considers a business to be "in business" when it begins operations and is ready to generate income, not necessarily when it actually receives its first dollar. Since your wife has a contract and has taken concrete steps to set up operations (meetings, equipment, office), she's likely already "in business" from a tax perspective, even without revenue yet. Those would generally be regular business expenses on Schedule C rather than amortized startup costs. But some of her very early expenses from before she had the contract might qualify as startup costs under Section 195. This is somewhat of a gray area where documentation of timing is important.

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Javier Morales

I've used both TurboTax and H&R Block for my small business, and honestly they both do the same annoying thing with the repeated "are you sure" questions when you have expenses but no income. FreeTaxUSA was actually much less pushy about it - just asked once if it was a legitimate business and moved on. The key with any software is to be confident in your answers. If you have a real business (like OP's wife with her contract), just keep clicking through those warnings. They're designed to catch people trying to deduct hobby expenses, not legitimate startups that haven't turned a profit yet.

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