What is a Sole Proprietorship? Can I deduct expenses I incurred in setting up my business even though the business is not yet earning revenues?

These are my questions.  I am just starting to research a little bit about whether and to what extent I can take a deduction for the expenses that I have used to establish a sole proprietorship.  Aspire to Grace is my business venture.  In taking a deduction on the business expenses I incurred in setting up my business, I must establish Aspire to Grace as a business for which I intend to make a profit, as opposed to a hobby, for which expenses are not generally taxable.  

A sole proprietorship (SP) is the simplest business organization that can exist for tax purposes.  It is completely intermingled with the owner of the SP.  The assets of the SP are the assets of the owner.  The losses of the SP are the losses of the owner.  When the owner dies, so does the SP. 

A sole proprietor can figure the amount of business profits and losses on Form 1040 Schedule C (profits and loss), Schedule C-EZ (net profits), or Schedule SE (self-employment tax).  Please do your own research or consult with your tax professional before filing any of these forms for your business. 

I still have a lot of research to do myself.  But, my initial take is that I can deduct some of the expenses I incurred in starting Aspire to Grace, including computer and software expenses.  Since these items have a useful life that is significantly longer than the year that I placed these items into service for my business, I will need to depreciate this property and take partial losses in the taxable years for these items.  Please note that although, for purposes of taking a loss on a depreciable item you are spreading the cost of the item over a number of years, you can not carry over deductions for depreciable items.  According to the IRS, “allowable depreciation not taken in a prior year cannot be taken in the current year.”

If you have a sole proprietorship and are planning to file taxes on your business for the year 2008, please read the following IRS publications and, where appropriate, consult a tax advisor or certified accountant for guidance on how to proceed: 

Publication 334 – Small Business

Publication 946 – How To Depreciate Property – if property has a useful life substantially beyond the year it is placed into service, you may be required to depreciate the property and take partial deductions spread out over more than one year.

Publication 535 – Business Expenses

LITE FARE FRIDAYS is anything thing that I feel like discussing on that day.  I will try to keep it light just in time for the weekend!

 The comments and opinions contained in this post and on this site are strictly the opinions of the author and are not provided here as an authority.  Please do your own research or consult with a professional in the field before you act upon any ideas or comments on this site.  Acting upon anything contained on this site shall be done at your own risk.  

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1 Comment

Filed under Alternative Income Sources, business, Light Fare, Passive and Alternative Income

One response to “What is a Sole Proprietorship? Can I deduct expenses I incurred in setting up my business even though the business is not yet earning revenues?

  1. Pingback: Quicken Rental Property Manager - Discounts, Cash Back and Additional Value « Aspire to Grace

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