Startups Stack Exchange Archive

Tax deduction for year(s) of no revenue?

• posted by: xyz on 2017-04-01
• tagged: taxes
• score: 4

Let’s say I am developing a product for 1 year with no revenue. Therefore, I am not taking a salary I otherwise would. Then next year I start to sell the product and end up with a profit of $100k. Is there some IRS rule where you can ‘spread’ profits back through the development timeframe, instead of getting hit with a high tax rate? In other words, could I back-pay myself $50k for the prior year and the other $50k for the current year, and get taxed on that accordingly?

If it matters, I am using savings for living expenses and have been registered as an LLC (pass through entity) for the full duration of development.

Answer 12395

• posted by: Jeff O’Neill on 2017-04-01
• score: 2

I’ll give an answer, but I’m not an expert in this type of thing so hopefully someone else can confirm…

As an individual, you can’t deduct living expenses from your taxes and you can’t spread your income earned in one year over multiple years.

If you elect to have the LLC taxed as a corporation, then you can treat the LLC income separate from your own. You could do something like the following:

• Loan $100k of your own money to the LLC.
• Pay yourself $50k in salary in year 1. The LLC has a tax loss that you can carry forward and your personal income is taxed at $50k.
• Pay yourself $50k in salary in year 2. We are assuming that the LLC now has revenue of $100k in the second year. After paying your salary and carrying forward the loss from the previous year and the LLC has $0 profit and pays no tax. You pay taxes on $50k of income.
• In year 3, the LLC continues to make money and you pay corporate taxes for the LLC and personal taxes for your own salary.
• Eventually have the LLC pay the loan back to you.

The above is probably a terrible idea because:

• If the LLC never makes any money, you are paying income taxes even though you have never generated any profit.
• There is a lot of overhead and paperwork in setting up the corporation, handling the loan, and setting yourself up as an employee (which is much different from pass through taxation as an owner). This almosts certainly costs more than any tax savings that you obtain.

So to sum it all up, no, you can’t really do what you are asking.

---

All content is licensed under CC BY-SA 3.0.