Sole Proprietorship with no 1099

[hiddenbay]

I am a resident applying to fellowship right now. I'm going to try to work as an independent contractor in fellowship and when I become an attending. I'm thinking about starting a sole proprietorship now and write off educational expenses such as board prep and licensing fees on Schedule C, since the Tax Cuts and and Jobs Act won't allow me to do so on Schedule A anymore.

My question is, I won't start working as an independent contractor until next year, so I won't have any income but I will have expenses. Would I be able to write off the loss against my W2 income in residency?

 

[DMFA]

If you have zero income with your business and only losses, then I think you'd probably be up against hobby rules (you're supposed to intend to make a profit with your business) and/or passive actvitity loss limitations (since you're not materially participating in working as a sole proprietor) and could probably couldn't deduct your Schedule C loss below zero...so, you could reduce your zero Schedule C income, to, well, zero.  If you could fully deduct them against your other income, then everyone would be deducting them on Schedule C for their sole proprietorships for which we do no work.  You might be able to try to take them as "Business Start-Up Costs," and amortize them over 15 years, but I think this is more of a hassle than you'd think and usually applies to acquiring workers, equipment, etc.  This'd be a stretch.

Plus, many such expenses aren't even deductible, esp if it was your first license or first exam.  While it's true that "board certification" isn't really in the "minimum requirements of your present trade," IRS pub 535 states:

You can also deduct the cost of your own education (including certain related travel) related to your trade or business. You must be able to show the education maintains or improves skills required in your trade or business, or that it is required by law or regulations, for keeping your license to practice, status, or job. For example, an attorney can deduct the cost of attending Continuing Legal Education (CLE) classes that are required by the state bar association to maintain his or her license to practice law.

Education expenses you incur to meet the minimum requirements of your present trade or business, or those that qualify you for a new trade or business, aren’t deductible. This is true even if the education maintains or improves skills presently required in your business. For more information on education expenses, see Pub. 970.

So if it's your first license, or your USMLE Step 3, you need those just to be an independently practicing physician, which isn't deductible.  However, if it's for *keeping* your license or status, or simply maintaining/improving skills, like subsequent board exams and their prep and CME, then it's deductible.

Honestly, the IRS sees sole proprietorships and single-member LLCs as disregarded entities anyway.  So basically, we're all sole proprietors, we're just not filing Schedule C every year.  A sole prop which isn't an LLC isn't even a true separate entity at the state level, even with a "fictitious name;" and the LLC is a state-level entity which only files IRS taxes under its sole proprietor (unless they take an S election which is def not worth it for side jobs).

I'd be surprised if any unreimbursed expenses exceeded 2% of your AGI for you even to have been able to deduct them on Schedule A last year - you must have owned a house (interest and tax) or had high health expenses (>7.5% AGI) if you were itemizing anyway, and prob won't itemize at all now that it's $12,000 for single.

If you're only on a resident salary, you're probably in a low bracket, so you're fighting p much for a 12-24% discount on those expenses.  Might be worth a couple hundred dollars.

I'm neither a tax lawyer nor an accountant, but I'm pretty sure based on the above that your idea is a no-go.  Why can't you earn anything before the end of the year?  Credentialing is slow, but you might be able to pick up a shift or two.