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This sort of falls into personal finance and money but also has a lot to do with business so I am asking the question here.

I have just recently started a LLC of which I am the sole member. I am pouring every bit of cash that I can scrounge into the business. For now, the business is conducted outside of my 9 to 5 job which pays the bills. To facilitate the funding of the business, I have adjusted the withholding on my paychecks such that I have the least amount of tax held (single and 10). I don't expect to be profitable this year. So, as I understand it, the business is a 'pass through entity' and so the loss will be passed on directly to me. So, if I show a loss of $20,000, is that amount deducted directly from my personal taxable income? I just want to keep rough tabs on my personal tax liability so that I am not surprised come April of 2013.

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Don't take my answer (or anyone else's) as a tax advice, consult a real flesh-and-blood professional for that. As a tax practitioner I must put a disclaimer that this answer is not written to be used and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

Having said that... There are different kinds of losses. If your business is a passive activity, you can't deduct all that much a year. Startup expenses are limited to at most $5000, above that (and in some cases below that) you have to capitalize. Also, not every expense my be deductible, and not every expense may be deductible at a loss, even if it is deductible when you have profits.

In case of tax underpayment, you'll have to pay penalties and fines to the IRS. So before you stop the withholding, better consult with a tax professional, get an estimate of what you're able to expense and when, and what taxes you should be paying, and calculate the values on your W-4 based on that, not a hunch.

Don't start your business with making very costly and painful mistakes. If you're going to sustain $20K loss, you're definitely in a position to spend $200-$300 on a tax consultation with an EA or a CPA.

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"There are different kinds of losses." - It doesn't say in the question that Jason has passive activity. He is most likely performing all the work (i.e., after day job) so it's mostly likely not passive activity. – Vasiliy May 31 '12 at 0:50
@Vasiliy I looked at several of your answers on the issues relating to taxes, and you're clearly clueless. I would suggest you not giving people advices on issues you do not understand. The fact that he performs all the work may or may not mean it is passive, and in fact it may not at all be relevant. What is important is to make sure the OP understands that he must seek a professional advice. And only for the reason that the people who answer questions here know nothing of what they're talking about, as you have shown so well. – littleadv May 31 '12 at 0:54
@Vasiliy, did you just downvote me? Because I dared to correct your mistakes? You don't have any shame, do you? – littleadv May 31 '12 at 1:10
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Are you are a sole proprietorship or a corporation? I assume you are a sole proprietorship since you didn’t mention anything about being a corporation. In this case your business losses will be “passed through” to your personal tax return for the year and you will be able to deduct the losses from your W-2 income (or other active income).

There are some rules regarding certain types of expenses you incur before you actually start your business. They are called start-up costs. Only $5,000 of those can be deducted during the first year and the rest can be deducted as amortization expense over 180 months. In the end, the amount still gets deducted, just not during the first year.

Keep in mind (for the future) that IRS doesn’t like when you have losses for multiple years (they can say it’s not a valid business if you keep losing money).

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I wonder who downvotes one's answer without even leaving a comment about the reason? If there is a valid reason, refer to authoritative literature to support why you believe my answer was incorrect. – Vasiliy May 22 '12 at 20:09
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Vasiliy, you're plain wrong. You cannot deduct startup losses from W-2 income (or other active income), there are specific rules as to how to handle that, and the "laymen" advices such as yours are what's causing a lot of innocent taxpayers to make very costly mistakes. I explained it in my answer. – littleadv May 30 '12 at 21:02
@littleadv, I think you are being too picky and trying to downvote others instead of providing constructive feedback. Now, to your comment. You will notice in the question that there is no mention of start-up costs, which is why they are not addressed in my answer. Jason is probably actively in the business already, so making a point about start-up costs is not applicable, but I still adjusted by answer. Further, start-up costs do get deducted, as $5,000 the first year and then amortized over 180 months. Here is link if you want to read more: irs.gov/publications/p535/ch08.html. – Vasiliy May 31 '12 at 0:54
@Vasily, read this sentence: "I have just recently started a LLC of which I am the sole member. I am pouring every bit of cash that I can scrounge into the business.". Now people who are not tax professionals may not be aware at all of the difference between startup costs and other expenses (giving you as an example), that is why its not mentioned. People may not be aware of the differences between passive activities and active income (again, the fact that he does all the work may not be relevant at all), that is why I prefer to suggest issues to look at rather than say incorrect things. – littleadv May 31 '12 at 0:57
@littleadv, also see examples of start-up costs in the link provided. Are they applicable to Jason? May be yes, but may be not. My feeling is they aren't. Overall, Jason seems to be in the business already, and it doesn't appear to be passive activity business, so all his expenses (except start-up costs) can be deducted. Point me with a link to irs publication where it says otherwise. Of course, I can miss something and will be glad to learn if I did. Also, in terms of "laymen" advices (should be 'advice'?), I am a CPA. – Vasiliy May 31 '12 at 0:58
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