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.
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.
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).