I'm planning on starting a business in 2010 and will spend around $10,000 on it during 2010. Will I be better off tax-wise by incorporating as an LLC?
Specifically, I'm thinking that I'll be able to deduct the $10,000 from my taxable income next year vs. taking the standard deduction of $5,700 (or whatever it will be next year). I have no other deductions, so other than possibly these business expenses, I would have no reason to itemize. If I can deduct the $10,000, do I even need to bother forming an LLC or could I deduct them just the same without incorporating at all?
Also, does it matter whether the business thrives or fails? Or can I deduct the $10,000 from my income regardless?
And do I need to worry about classifying the 10K as startup expenses?
Any guidance is appreciated.
Corporate / Incorporation Lawyer
Here's a very brief response. Expenses incurred during startup are typically amortized and deducted as a business expense over a period of 180 months. At the moment, however, you may deduct the first $5000 of startup expenses immediately, with the balance amortized.
Here's a few side notes to consider. First, spending money with no hope of a return simply to reduce taxes is a fool's errand. After all, the deduction is worth, at most and depending on your tax bracket, 35% of the amount you spend. Second, spending money with no intention of pursuing a "real business" may be deemed a cost of a hobby, not a genuine business expense, and therefore not deductible at all. Finally, because of self-employment "taxes" and depending on your individual circumstances, it may be worthwhile for you to elect treatment under Subchapter S, even if you prefer to conduct your business as an LLC.
Disclaimer: The answer to your question does not create an attorney-client relationship, and is for informational purposes only. You should consult your attorney for legal advice tailored to your individual circumstances. The answer is not, nor is it intended to be, legal advice.
If you conduct a business, the deductible business expenses of it are not subject to the limitations on itemized personal deductions, so there should be very little difference tax-wise between operating as an LLC (taxed as a partnership or S corporation) or a sole proprietorship. In fact, if it is a single person LLC it will likely qualify as a disregarded entity, in which case you report the income and deductions on Sched C of your Form 1040, just like a sole propietor.
Part of your question would appear to deal with the extent to which start up expenses can be currently deducted or have to be amortized. Mr. Stansell handled that well. Certain startup expenses fall into both categories, and some have to be capitalized.
Another part of your question seemed to ask whether business expense deduction would be denied if the business fails. Generally, otherwise legitimate business deductions can be denied if they are determined to be nondeductible hobby losses under IRC sec. 183. The rule of thumb is in order to avoid hobby loss treatment the business should make a profit in at least three of five years ending with the year in question.
There are other reasons why you should operate through a separate legal entity. You should consult a competent business and tax attorney to resolve the choice of entity issue.