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

Yes, getting a business off the ground takes time, and the IRS recognizes this. In your first few months or year of operation you may not bring in any income. Even without income, you may be able to deduct your expenses, as long as you meet certain IRS guidelines. Your business loss can offset other income on your tax return and lower your overall tax bill. The test for being able to deduct your expenses is whether you are operating a true business and not practicing a hobby.

If you are in business to make a profit and you behave that way, you should continue to claim business income and expenses regardless of how many years you show a loss.

According to the IRS:

"In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. A hobby activity is done mainly for recreation or pleasure. No one factor alone is decisive. You must generally consider these factors in determining whether an activity is a business engaged in making a profit:

• Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
• Whether the time and effort you put into the activity indicate you intend to make it profitable.
• Whether you depend on income from the activity for your livelihood.
• Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
• Whether you change your methods of operation in an attempt to improve profitability.
• Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
• Whether you were successful in making a profit in similar activities in the past.
• Whether the activity makes a profit in some years and how much profit it makes.
• Whether you can expect to make a future profit from the appreciation of the assets used in the activity."

How do you distinguish between a business and a hobby?

@JackalopeB

It is generally expected that a business will not show a profit in it's first three years of operation *IN GENERAL*. It just depends on what the business is. Depending on that, if you show a loss in the 4th year it may raise a few eyebrows. But nothing that you'll hear about. But in the 5th year (again, depending on what the business does) it will probably raise flags at the IRS that basically say, "lets make sure to check this return next year (year 6 of the business) and see if it shows a profit then."

I started a quilting business in 2021.  I have one sale so far for $150.  I purchased equipment, sewing supplies, fabric, etc.  My question has to do with what items I can deduct as expenses.  I have receipts for many of the items I purchased so I know those can be listed as expenses.  What about the items I don't have receipts for like fabric and embroidery sewing machine that I purchased at an estate sale/yard sale.  I paid $3000 for the machine and fabric but I don't have a receipt for it.  Can I still claim these items?

Thanks, Linda

Hello!

Besides my day job, I've worked and filed my returns as an independent contractor (karaoke host/DJ) for nearly 20 years, making small but decent profits every year until 2020 when Covid closed the bars I had shows at, and the private party business came to a total standstill.  I filed my 2020 taxes as usual (using Turbotax), but for the first time the expenses I had to report exceeded income, because I only made money through March that year.

Flash forward to today, as I work on filing my 2021 return.  I had no self-employment income at all in 2021, although I hope to be back to work in just a couple more months.  At least I'd get to save myself some work and only file a SIMPLE return for 2021 -- although I still had related expenses it didn't seem right claiming them against zero income.

Here's my conundrum:  Turbotax is still insisting I enter my business expenses, even though I've already put in zero for my self-employment income.  I went through the expenses menu I'd been hoping to avoid, just entering zeros or hitting return, but it's still showing the expenses questions as "unstarted".  And it wants me to fill-in amounts on a 1099-misc for the last bar I worked (in 2020) even though I didn't work there in 2021, and have no current 1099-misc for that employer.  And of course it wants me to switch to the more expensive filing plan for self-employed filers even though I'm trying to file a simple return.

Should I simply give in and claim my usual expenses (home office, mileage, advertising, supplies, etc, etc) even though I have NO income to report?  Would that actually get me a larger refund?  Is that even legal?

So much for having a "simple" tax filing this year.

I started up my llc Home Inspection Company middle the year but  haven't made any income yet. I've spend over 120.00 on my work phone per month plus my tools cost about 1500.00 not to mention the extra stuff that I had to buy for my work truck plus my truck payment is 488.00 mo. I consulted with a Accountant and he said starting next year you'll be able to write off your expenses and also since it's out of your home a percentage of my rent. Curious why I couldn't write these expenses off this year. But you need to show you've made some sort of income to write all of those expenses off. Is this true? Thanks for your help