When Can You Start Deducting Your Expenses?

When switching from being a W-2 employee to a 1099 contractor, optimizing your tax setup is extremely important. One way to do this is to maximize your deductions. However, a lot of times the costs of running a business start happening long before you have to time to consider your taxes.

So, when exactly can you start deducting your expenses related to your business; e.g., if I open an LLC in July, how far back can I begin deducting home-office or other business expenses?
This is a question that most independent contractors ask after the fact, once the hurdles of starting business are accomplished.

So, when can you start deducting your expense? How far back can you go?

As a rule of thumb, you can begin deducting business expenses when you are in business. “Well”, you ask, “when am I ‘in business’?” Excellent question.

As is frequently the case, it depends on your facts and circumstances. There is no bright-line indicator for when you are actually in business. But, if you’re past the point of simply considering opening a business and you’re actively trying to court business or sell your product/services, then you are most likely already “in business” even if you haven’t generated a dollar or revenue. It wouldn’t be a bad idea to consult with a CPA regarding this if you’re not sure.

I’m a Sole Proprietor transitioning to an S corporation

If you’ve been in business for yourself as a sole proprietor and are transitioning to operate through an S Corporation, then you may wonder if an expense should be deducted through the sole proprietorship or the new S corporation. Generally speaking, the month in which you open your LLC is the month that you should start deducting your expenses in the LLC instead of through your sole proprietorship.

Please note, if you have the option of deducting an expense in either your sole proprietorship or your new S corporation, you are probably better off deducting it in the sole proprietorship, because that income is subject to more taxes than your S corporation income, so the deduction is worth more in after-tax savings.

What are startup costs?

Startup costs generally consist of one-time expenses that are necessary to start your business. So, necessary equipment expenses, research expenses, and lawyer fees are just some examples of startup costs. When you are in startup mode, you are developing the capability to start doing business; i.e., you’re not “in business” yet.

Startup costs are deducted in a different manner. You would add up your expenses for the startup period and amortize the sum total of those expenses. You will be able to deduct $5,000 of startup costs immediately and $5,000 organizational expenses immediately. Additional expenses are amortized over the course of 15 years.

We hope you got an answer to the question “When Can You Start Deducting Your Expenses?”. At Independent Contractor Tax Advisors we keep a keen eye on all your financial interests while maximizing your tax savings, it’s just what we do. Contact us today for a free tax consultation!

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Tags: corp to corp, Dedcutions, independent contractor, s corporation, self-employed