I agree with Judy that you'll be putting your business on a Schedule C as part of your personal 1040. (I also agree about hiring an enrolled agent but I'm biased.)
Generally, a small business would amortize its start- up expenses (that means deduct it over a number of years), but just this month Congress passed the Small Business Tax Relief Bill. One of the provisions of the bill is that you will be allowed to deduct up to $20,000 in start-up expenses on your tax return.
Here's how it looks for you: you have $2,000 of income and $10,000 of expenses. Your schedule C will show a loss of $8,000 on your tax return. Your $45,000 wage income will be reduced by $8,000 making your (warning--tax jargon ahead) adjusted gross income $37,000. That means you'll pay less taxes for 2010. (Probably get a refund if you've been withholding correctly.)
So this is all looking really good for you. Now here's my warning. Next year you plan to have a profit. (That's not a warning, that's a yippie!) The warning part is, the profit on your schedule C is actually double taxed. Let's say you have a $10,000 profit in 2011. That $10,000 will be taxed at your regular tax rate which given your current wage income is 15%. Then, that same $10,000 will also be taxed at the self employment tax rate which is also 15%. This makes your self employment income taxed at 30% or twice the amount of your wage income.
What this means is that it's really important for you to keep good records and be sure to claim every legitimate business expense deduction that is allowable to you.
The first link is to an accounting website that backs up my claim about the new tax bill. If you go to the site, you'll need to scroll down to get to the article. The second is my blog about my favorite part of the tax bill-the health insurance deduction. The third is about the home office deduction, because I think this might be something you can claim. Congratulations on your new business!.***:D
I had the same situation when I started mine roughly. Just documented everything. Things were simple enough for me to use an excel spreadsheet.
Let turbo tax handle it. I had a net loss that exceeded my maximum deduction...which passes onto next year...TurboTax will handlebar next year.
Decided for accounting purposes to backtrack.
I used a single credit card for only business purchases. You can't deduct the credit card payments as a whole since you already deducted the cost, but you can deduct the interstate which becomes a pain.
So since I maxed deductions....I included each credit card purchase as a source of income (the credit)...it wipes out the costs....but now I can include the entire credit card payment as a cost....it reduced my loses over the course of a year...I still had a net loss and overall, easier accounting.
I'm starting a small business w/ startup cost of about $10k. It's a home based operation operation under an LLC I formed. Lets say that THIS year I only make $2k w/ the short
