Sartup business expenses

[Unregistered]

Client, in 2005, on person scorp, agreed to buy gas station. Incurred expenses total $12,000 for loan fees, deposits to seller etc. Some how contract did not go through. Scorp did not get any money back.

Can client deduct these expenses?

If he can, should he deduct in s corp - there was no activity,in 2005, in corp.

Can he deduct in his personal return?

Client did buy grocery store under same corp ID in 2006

Can he include these expenses in 2006 return?

Thanks!

[Bees Knees]

TTB, page 8-18, "Individuals. If an individual attempts to go into business and is not successful in starting the business, the expenses incurred in trying to establish the business fall into two categories:

1) Costs incurred before making a decision to acquire or begin a specific business are personal and nondeductible. They include any costs incurred during a general search for, or preliminary investigation of a business.

2) Costs incurred in an attempt to acquire or begin a specific business are capital expenses and can be deducted as a capital loss.

Corporations. If a corporation attempts to go into a new trade or business and is not successful, all investigatory costs are deductible as a loss. The cost of any assets acquired during the unsuccessful attempt at going into business are part of the basis in the assets. Such costs are recovered when the assets are disposed of."

[Bees Knees]

Since your case involves an S corporation, I would have the S corporation file a 2005 tax return, which would generate a deductible loss on the K-1 for the shareholder. The shareholder needs to have basis in the K-1 loss in order to deduct it on his 1040. If the shareholder does not have any other income on his 2005 1040, the K-1 loss could generate an NOL on his 1040 that could be carried forward to 2006.

[Unregistered]

Since your case involves an S corporation, I would have the S corporation file a 2005 tax return, which would generate a deductible loss on the K-1 for the shareholder. The shareholder needs to have basis in the K-1 loss in order to deduct it on his 1040. If the shareholder does not have any other income on his 2005 1040, the K-1 loss could generate an NOL on his 1040 that could be carried forward to 2006.

Thanks!

Scorp got money from the share holder. This money is nothing but "loan" to scorp and then S corp incurred these expenses. So shareholder has basis in this corp. Therefor he should be able to deduct it. Do you agree?

[Bees Knees]

Yes I agree.

[skhyatt]

sole prop.

Bees: So if a sole prop. trys to start a Sch C business and fails or calls it quits before the first year, he would have a capital loss reportable on Scd D?

Don't have my book yet or I'd look it up. Thanks.

[Bees Knees]

yes

This is all in the context of business start up costs. A business cannot deduct expenses until it starts [IRC Section 195(a)]. Start up costs are capital costs. IF the business does eventually start, the start up costs are eligible for expensing and amortization, but that is a big IF the trade or business actually begins [IRC Section 195(b)(1)].

So whether it is drilling for oil and comming up dry, or a Schedule C sole proprietor that never gets to the point of opening the doors for business, all start up costs are capital costs. You have to treat them as such if the business never gets off the ground.