Can an LLC Really Deduct Expenses Without Income – Don’t Make This Mistake + FAQs

Yes, an LLC can deduct expenses even with no income – it’s a common situation for startups and businesses in a loss.

In fact, many LLCs incur costs before turning a profit. The key is that these expenses must be legitimate business expenses. When an LLC has more expenses than income in a tax year, it results in a net loss.

That loss can often offset other income or be carried forward to future years, reducing taxes when the business does make money. Below, we break down exactly how this works, what to watch out for, and expert tips to stay on the right side of tax laws.

No Income, Big Write-Offs: How the IRS Treats Your LLC Losses

LLCs frequently face the scenario of spending money without earning any in the early stages or during slow periods. The Internal Revenue Service (IRS) understands this reality. Tax laws allow you to claim business expenses even if your LLC’s revenue is zero – as long as you meet certain criteria. Here’s how it works:

Ordinary and Necessary: The Golden Rule for Business Expenses

The IRS permits deductions for expenses that are ordinary and necessary for your business. In simple terms, an expense must be common in your industry (ordinary) and helpful or appropriate for your business (necessary). If your LLC spends money on things like advertising, rent, equipment, or supplies in a year with no sales, those costs are still ordinary and necessary for running and growing the business.

Key point: It doesn’t matter if you earned income or not – what matters is business purpose. You can write off (deduct) any expense that is directly related to operating your business and properly documented. This includes:

• Startup costs (e.g. market research, initial marketing, LLC formation fees)
• Operating expenses (e.g. office rent, utilities, inventory, travel, advertising)
• Employee or contractor costs (e.g. wages, freelancer payments)
• Office supplies and equipment (e.g. computers, software – though large purchases may be capitalized or depreciated)

However, personal or unrelated expenses are never deductible as business costs. You should avoid trying to run personal bills through your LLC. (We’ll cover mistakes to avoid in detail later.)

No Income, No Problem: Claiming a Net Operating Loss (NOL)

So what happens when your LLC’s deductions are bigger than its income? You end up with a net operating loss (NOL) for the year. This simply means your business had a loss. The good news is, a loss isn’t wasted. Tax rules allow you to use that loss to save on taxes in other ways:

• If your LLC is a pass-through entity (more on this below), the loss can offset other income on your personal tax return. For example, if you had a $10,000 loss from your LLC and you have a day job salary, that $10,000 loss can reduce your taxable salary income.
• If you don’t have other income to offset this year, you can carry the loss forward to future tax years. In later years, when your business makes profit, the carried-forward losses can reduce those profits (and your tax bill). This means you get to deduct those expenses eventually, just not immediately as a refund.

💡 Expert Tip: Always file a tax return for your LLC in a loss year, even if you made no money. Reporting the loss officially lets you carry it forward or offset other income. If you skip filing, you could lose the benefit of those deductions.

How long can you carry forward a loss? Federal tax law currently allows you to carry NOLs forward indefinitely until used up (thanks to recent tax reforms), although each year you can only use the loss to offset up to 80% of that year’s taxable income. Essentially, your LLC’s loss today can become a valuable tax write-off tomorrow when business picks up.

Pass-Through vs. Corporation: Who Claims the Loss?

Your LLC’s tax classification affects how the loss is used:

• Pass-through LLCs (Sole Proprietorships and Partnerships): Most LLCs are taxed as pass-through entities by default. If you’re a single-member LLC, you report business income and expenses on your personal tax return (Schedule C of Form 1040). A multi-member LLC files a partnership return (Form 1065) and each owner gets a K-1 showing their share of profit or loss. In a no-income year, your Schedule C or K-1 will show a loss. You (the owner) can generally use that loss to offset your other personal income (like wages, investment income, or a spouse’s income on a joint return), subject to some IRS limitations. If the loss exceeds your other income, you carry it forward as an NOL.

• LLCs taxed as S-Corporations: An LLC can elect S-Corp status. It still passes losses through to owners similar to a partnership. Owners can deduct the loss on their personal returns, as long as they have enough basis (investment in the company) and are actively involved (to avoid passive loss limits).

• LLCs taxed as C-Corporations: Less commonly, an LLC may choose to be taxed as a C-Corp. In that case, the corporation itself retains the loss. The company files a corporate tax return (Form 1120) reporting the loss. The owners do not personally deduct it. Instead, the corporation carries the NOL forward to offset future corporate profits (up to the allowed limit each year). The loss won’t directly reduce the owners’ personal taxes, but it will save the company money in future profitable years.

No matter the classification, the initial question of “Can you deduct expenses with no income?” is yes – either you or your company will claim the loss. The main difference is whether the tax benefit shows up on your personal return or stays within the company.

Filing Tax Returns in a Zero-Income Year (Don’t Skip!)

One mistake new business owners make is assuming that no income means no need to file taxes. This is wrong! If you want the deduction for those expenses, you must file a tax return to claim them. Here’s what that looks like for different LLC setups:

• Single-Member LLC (disregarded entity): You include the LLC’s income and expenses on your Form 1040 (Schedule C). Even if your Schedule C shows $0 income and, say, $5,000 in expenses (a $5,000 loss), you file it with your 1040. The loss then either offsets your other income or becomes an NOL.

• Multi-Member LLC (partnership): The LLC must file Form 1065 (partnership return) even if revenues are zero. The Form 1065 will report the expenses and show a loss. Each member gets a Schedule K-1 showing their share (e.g., a 50/50 two-member LLC with a $4,000 loss gives each member a K-1 with a $2,000 loss). The members will use that K-1 on their personal taxes to deduct the loss. Failing to file the partnership return can lead to IRS penalties, even if no tax is due.

• LLC taxed as S-Corp or C-Corp: You must file the corporate tax return (1120S or 1120) by the deadline, reporting the loss. S-Corp shareholders will then get K-1s for their share of the loss, similar to partnership above. C-Corp losses stay in the company return.

Bottom line: Always file the required tax forms for your LLC, profit or not. It not only keeps your business in good standing legally, but also locks in those valuable deductions. Plus, it demonstrates to the IRS that you are treating the venture as a real business (not ignoring it like an unimportant hobby).

Avoid the “Hobby” Label: Proving Your LLC Is a Real Business

If your LLC continually has no income but plenty of expenses, the IRS might start to wonder if it’s a real business or just an expensive hobby. The distinction is crucial: True businesses can deduct losses, but hobbies cannot (at least not beyond any hobby income).

The IRS has what’s known as the “hobby loss” rule. Under this rule, if your activity is not engaged in for profit, it’s a hobby, and you cannot deduct losses to exceed income. In other words, you can’t use a hobby’s expenses to reduce your other income. For an LLC, being classified as a hobby would mean all those deductions you took with no income could be disallowed.

How do you show profit motive? Generally, the IRS expects a legitimate business to make a profit in at least 3 out of 5 years. If you’ve gone several years in a row with losses, it’s a red flag. But it’s not just about the 3/5 rule – the IRS looks at many factors to decide if you’re running a business or just having fun. Some factors include:

• Businesslike operations: Do you keep records, a separate bank account, and generally run the LLC in a professional manner?
• Time and effort: Are you putting substantial time into the venture, indicating you’re trying to make it profitable?
• Expertise: Do you have the know-how (or have you consulted experts) to improve profitability?
• History of income or losses: Have you ever made a profit, or are losses mounting with no end in sight?
• Dependence on income: Do you depend on this LLC’s income for your livelihood, or do you have other income (suggesting the activity could be more for pleasure)?

The more you can answer these in favor of “it’s a real business,” the better.

💡 Expert Tip: Document your efforts to turn a profit. Keep a business plan, track your marketing efforts, and log hours spent working on the LLC. If the IRS ever questions the losses, you’ll have evidence to show it’s not just a casual hobby.

What if your LLC is deemed a hobby? Then the IRS will limit your deductions to the amount of income the hobby generated. For example, if you made $0 income, you get $0 deduction (you can’t claim the loss at all). In fact, after tax law changes in 2018, hobby expenses aren’t even deductible as itemized deductions anymore – meaning you’d simply be out of luck. The IRS could also retroactively disallow past loss deductions if they decide those years were hobby activity, potentially leading to back taxes and penalties.

The good news: Occasional losses or a couple of unprofitable years are not a problem if you truly are trying to make money. The IRS knows new businesses can take time to turn a profit or that an established business might hit a rough patch. Just be prepared to show that you have a genuine profit intent. If you have repeated loss years, consider adjusting your business strategy to show improvement or at least document the changes you’re making to become profitable. This will help protect your deductions.

3 Real-Life Scenarios of Deducting Expenses with No Income

Let’s look at some concrete examples of how an LLC can handle expenses in a zero-income year. These scenarios illustrate what’s allowed, how to report it, and what the outcome looks like:

Scenario 1: First-Year Startup LLC with Zero Revenue

The situation: You just formed an LLC this year. You haven’t made any sales yet (no revenue), but you have spent money on startup and operating expenses. For instance, suppose you:

• Paid $300 in state LLC formation fees and legal costs.
• Spent $2,000 on a new computer and office equipment.
• Spent $1,200 on advertising and market research.
• Incurred $500 in other costs (supplies, business travel, etc).

By year-end, your total expenses are $4,000 and income is $0.

Can you deduct these $4,000 of expenses? Yes. This will result in a $4,000 business loss for the year.

Here’s how it might look:

In this scenario, you would file your taxes reporting a $4,000 loss. Because there’s no income within the LLC, the entire $4,000 is a net operating loss. If you have any other taxable income (from a job, investments, etc.), this loss can reduce your overall taxable income for the year. If not, you’ll carry the $4,000 loss forward to use in future years when you do have income.

Special note on startup costs: The IRS allows new businesses to deduct up to $5,000 of startup costs immediately in the first year. In our example, the $300 in formation fees and any market research/launch costs fall under this category – which is well within $5k, so you’d deduct them fully. (If your startup costs exceeded $5,000, you could still deduct $5k and then spread the rest over 15 years.) The result: You still get to claim the expenses; it just might be partially over time for very large startup expenditures.

Scenario 2: Established LLC Facing a No-Income Year

The situation: Your LLC has been operating for a few years. This year, due to market conditions (or maybe you took a hiatus), the business earned no revenue. However, you still had ongoing expenses. Let’s say:

• Website hosting, software subscriptions: $600
• Office rent (home office or coworking space): $3,000
• Utilities, phone, internet dedicated to business: $800
• Insurance, licenses, miscellaneous: $600

Total expenses = $5,000, income = $0 for the year.

Can you deduct these expenses? Yes. You will report a $5,000 loss for the LLC this year.

In practice, if this is a single-member LLC, your Schedule C will show $0 income, $5,000 expense, = $5,000 loss. That loss will offset other income on your 1040 (if you have any). For example, if you had $50,000 of salary from a job, now your taxable income might only be calculated on $45,000 because the business loss reduces it. If you have no other income, the $5,000 becomes an NOL to carry forward.

If it’s a multi-member LLC, the partnership return will allocate the $5,000 loss among owners. Each owner can use their share of the $5,000 loss on their own taxes (with the limitations discussed earlier, like basis and passive loss rules if applicable).

Important: An occasional loss year in an otherwise profit-generating business is generally not a problem. Businesses can have ups and downs. Just be sure to document the reason (e.g. a downturn, increased investment in the business, etc.) and be ready to show it’s a one-off or temporary situation, not a lack of profit motive.

Scenario 3: Hobby or Business? (An Expense Deduction Gone Wrong)

The situation: Imagine someone sets up an LLC for an activity they enjoy – say photography – but with no real plan to make a profit. They had no clients and no income this year, but they spent $2,000 on a new camera and gear, and $500 on travel purely for taking photos as a personal enjoyment.

They attempt to deduct $2,500 as “business” expenses on their tax return, even though the “business” made no money and wasn’t actively trying to get customers.

Can they deduct these $2,500 of expenses? No, not as a business loss. In the eyes of the IRS, this looks like a hobby. There’s no sign of genuine business activity (no clients, no marketing, no income at all).

In this scenario, the IRS would likely deny the $2,500 deduction. Since the activity wasn’t a true for-profit venture, those costs are personal hobby expenses. The person cannot write them off to reduce other income.

The lesson: Simply having an LLC does not automatically make your expenses deductible. You need to run it like a business. If you want to deduct expenses with no income, be sure you’re trying to earn income. Otherwise, you could end up in a hobby trap where your “deductions” get disallowed.

Common Mistakes to Avoid When Deducting Expenses Without Income

Writing off business expenses in a no-income year can be a big benefit, but you need to do it right. Avoid these costly mistakes and red flags that could jeopardize your deductions or draw unwanted IRS attention:

• 🚫 Mixing personal and business expenses: Keep a clear line between business costs and personal spending. If you try to deduct your personal grocery or car payments through the LLC when you have no business revenue, it’s a huge red flag. Only claim expenses that are truly business-related.

• 🚫 Not keeping receipts or records: In a loss year, audits can happen because the IRS may scrutinize why you’re spending money without making any. If you can’t prove an expense was for the business, you risk losing the deduction. Save all receipts, invoices, and a log of business activities.

• 🚫 Failing to file required tax returns: As mentioned, always file your tax returns for the LLC, even if it shows a loss. If you skip filing because “there’s no income,” you not only forfeit the deduction, but you could face late-filing penalties (especially for partnerships or S-corps).

• 🚫 Expecting a refund when you had no other income: Remember, a tax deduction lowers taxable income; it’s not a direct refund. If your LLC’s loss simply creates an NOL carryforward (because you had no other income to offset), you won’t get a refund check for that loss this year. You’ll get the benefit in future years when you have profits. Plan your cash flow accordingly.

• 🚫 Ignoring state requirements: Even if the IRS is fine with your deductions, states have their own rules. Some require annual filings or fees regardless of income. (We cover state nuances next.) Don’t assume “no income, no tax” applies at the state level – missing a required state filing or payment can cost you.

• 🚫 Repeatedly losing money without changes: If year after year your LLC has losses, at some point the IRS could challenge the business status. Avoid just doing the same thing and hoping for profit. Make changes to try to turn it around, or at least be prepared with documentation to show your intent to eventually make profit. Don’t get complacent about continual losses.

By steering clear of these pitfalls, you’ll strengthen your position if ever questioned and ensure you truly reap the tax benefits of those deductions.

State Tax Nuances: No Income Doesn’t Always Mean No Tax

Federal tax law is fairly generous about letting you deduct business expenses without income, but what about state taxes? Each state can have its own twist. Here are some important points regarding state-level treatment of LLC losses and expenses:

• State income tax vs. no income tax: If you live (or your LLC operates) in a state with a personal or corporate income tax, you will generally report your business income or loss on the state tax return as well. Most states allow business losses similar to federal, but the details can vary. Some states have limits on net operating loss carryforwards (for example, a limit on how many years you can carry a loss, or they might not conform to the federal indefinite carryforward rule). Always check your state’s guidelines on NOLs. If you’re in a state with no income tax (like Texas, Florida, etc.), you won’t have a state income tax return for the business – which simplifies things, but keep an eye out for other taxes like franchise taxes.

• Franchise or LLC taxes/fees: Many states impose an annual tax or fee on LLCs regardless of income. For instance, California charges an $800 annual franchise tax for LLCs (though new LLCs are exempt in their first year under current law). This fee is due even if your LLC made zero dollars. The good news: that $800 (and any similar state fees) is usually deductible as a business expense on your federal return next year. Other states like Delaware, New York, Texas, and others have their own annual report fees or franchise taxes – sometimes a flat fee, sometimes based on business assets or capital. Don’t overlook these obligations, because failing to pay state LLC fees can lead to penalties or even the state revoking your LLC’s good standing.

• State filing requirements: Even if your LLC had no income, some states require you to file a state business tax return or at least an informational notice. For example, a multi-member LLC often has to file a state partnership return showing the loss. States may also require you to file something to keep the LLC active (annual reports, franchise tax forms). Missing these could mean extra fines. Always verify the rules in your LLC’s home state (and any state you’re registered to do business in).

• Differences in deductible expenses: Generally, what’s deductible federally is deductible at the state level, but there are exceptions. A few states might disallow certain federal deductions or have add-backs. These are more technical, but one example is how states handle bonus depreciation or Section 179 expensing – some states limit these. If you heavily depreciated an asset to create a loss federally, the state might require a slower depreciation, affecting the loss on your state return. Consult a tax professional for big deductions to see if your state treats them differently.

Bottom line on state taxes: Make sure you understand your state’s specific tax obligations for an LLC, even in a no-income year. Pay any required minimum taxes or fees to keep your LLC in compliance. While it can be frustrating to pay a state fee when you didn’t make money, think of it as the cost of maintaining the legal protection and future potential of your business (and remember to deduct that fee on your federal taxes where allowed).

Finally, let’s address some frequently asked questions on this topic:

FAQs: Deducting LLC Expenses with No Income (Quick Answers)

Q: Can I claim LLC business expenses if I had no revenue?
A: Yes. You can deduct legitimate business expenses even if the LLC earned no revenue. The result will be a business loss that can offset other income or carry forward to future tax years.

Q: Do I need to file taxes for my LLC if it made no money?
A: Yes. File a return if you had expenses or plan to claim the loss. Single-member LLCs file with your 1040 (Schedule C); multi-member LLCs file a partnership return to report the loss.

Q: Will I get a tax refund for an LLC loss if I had no other income?
A: No. A loss alone doesn’t trigger a refund. It can only offset other income (if you have any) or become a net operating loss to carry forward and use in future years.

Q: Can LLC losses offset my personal income (like salary or investments)?
A: Yes. In a pass-through LLC, the loss flows to your personal tax return. You can use that business loss to offset other income on your return, reducing your taxable income.

Q: Will the IRS get concerned if my LLC has losses for several years in a row?
A: Yes. The IRS may scrutinize a business that never shows a profit. Try to show a profit in at least 3 of 5 years; continuous losses can trigger hobby loss scrutiny.

Q: Are startup expenses deductible if I had no income yet?
A: Yes. Up to $5,000 of startup/organizational costs can be deducted in the first year (even with no income). Any excess over $5k is amortized over 15 years, so you still deduct it eventually.

Q: If my LLC had zero activity (no income, no expenses), do I still file?
A: No. If your LLC truly had no income and no expenses, a single-member LLC isn’t required to file for that year. But multi-member LLCs or corporations should file a nil return to stay compliant.

Q: Can I carry my LLC’s loss to next year?
A: Yes. Unused business losses can be carried forward to future years. Federal law lets you carry an NOL forward indefinitely (with yearly usage limits). Check your state’s rules for any differences.

Q: Does an LLC loss mean I don’t have to pay the state’s LLC fee or tax?
A: No. State LLC fees or franchise taxes still apply even if your LLC has no income. You must pay these annual fees to keep the LLC active. They’re a cost of maintaining an LLC.