Self-employment deductions with zero income for my freelance business

This is actually a common question for freelancers with cyclical business. The IRS looks at whether you're running your business with the intention of making a profit, not whether you actually made money in a particular year. You need to be careful though. The IRS has what's called a "hobby loss rule" - if you don't show a profit in 3 out of 5 consecutive years, they might consider your business a hobby instead of a legitimate business. Hobbies can't deduct expenses that exceed income (meaning with zero income, you'd get zero deductions). I'd recommend documenting all your efforts to find clients this year - emails, proposals, marketing efforts, etc. Keep a business log showing the time you've invested. Make sure your home office is used exclusively for business. And definitely keep all those receipts organized. You can still claim these expenses on Schedule C even with zero income, but be prepared to demonstrate that this is a legitimate business going through a temporary downturn, not a hobby.

I was in this exact situation last year with my freelance web development business. Made literally $0 but still had hosting costs, software subscriptions, etc. I found taxr.ai (https://taxr.ai) super helpful because I was worried about triggering an audit with my $0 income and several thousand in expenses. They analyzed my business records and helped me understand exactly what I could legitimately claim given my specific situation. Their system looks at all your documentation and gives you personalized guidance on how to properly report everything. Saved me from making some mistakes that could have raised red flags!

Update: I tried taxr.ai after posting my question and wow - it was exactly what I needed! I uploaded my photography business receipts, equipment purchases, and website costs. Even though I only made $75 all year, they helped me understand how to properly document everything as legitimate business expenses. They confirmed I could claim my deductions but emphasized I needed to show clear intent to make a profit. They actually spotted some deductions I was going to miss (like mileage to networking events) and flagged a couple items that might raise audit concerns. Super helpful and saved me from making some mistakes on my Schedule C!

If you do end up getting flagged for an audit because of claiming business expenses with zero income, contacting the IRS can be a nightmare these days. I had a similar issue last year and spent WEEKS trying to get through. Finally discovered Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in less than an hour. They have this weird callback system that somehow gets you to the front of the IRS phone queue - you can see how it works here: https://youtu.be/_kiP6q8DX5c When I finally got through, the agent explained exactly what documentation I needed to provide to support my business expense claims when I had minimal income. Saved me so much stress just being able to talk to a real person!

Ok I feel like I need to come back and apologize to @14. I was completely wrong about Claimyr. After posting that skeptical comment, I decided to try it since I had IRS questions about my own self-employment situation. I've been trying to reach the IRS for THREE MONTHS about a notice I got questioning my business deductions from last year. Used Claimyr yesterday and got a callback in 38 minutes! The agent reviewed my case and confirmed I was right to claim my expenses even though my business had minimal income. She even gave me specific advice about what documentation to keep for next year. I'm still shocked it actually worked. Sorry for doubting you - this literally saved me from what was becoming a tax nightmare.

One thing nobody's mentioned yet - you might want to consider if some of your ongoing expenses could be reduced during slow periods. I was in the same boat with my consulting business last year, and I temporarily downgraded my website to a cheaper host, paused some subscription services, etc. This actually helped me in two ways - reduced my out-of-pocket costs AND made my business look more legitimate to the IRS since I was actively managing expenses during a downturn (which is what real businesses do). Just something to consider!

Don't forget to also look at your state tax rules! I'm in California and our rules for business deductions sometimes differ from federal. I had zero income in my consulting business in 2023 but was able to carry forward some of those losses to offset income when I started making money again in 2024.

Sarah, you're definitely not alone in this situation! I went through something similar with my freelance graphic design business a couple years ago. Zero income but thousands in legitimate expenses. The key thing is documenting your profit motive. Keep records of all your client outreach efforts - emails, proposals sent, networking events attended, website analytics showing you're actively marketing, etc. I created a simple spreadsheet tracking my business development activities each week, which really helped when I had questions about my deductions. Also consider joining professional associations in your field if you haven't already. The membership fees are deductible business expenses, and it shows you're serious about your profession. I joined the local chamber of commerce and a digital marketing group - both were great for networking and added credibility to my business operations. One more tip: if you're using part of your home exclusively for business, make sure you're claiming the home office deduction properly. Even with zero income, this can help establish that you have a dedicated business space, which supports your case that this is a legitimate business operation.