new business

[tacks]

I have corresponded with an individual who's in the process of starting a business -- a side job. He has purchased a vehicle, supplies and equipment but it appears as though he wont have any revenue for 2009.

It's my initial thought that this will be a sole proprietorship starting in 2009. It sounds as if it will be a shedule C showing a loss. The schedule C loss will net against his regular income (which i assume will be w2 income).

But i've read that a schedule C showing expense with no revenue can be a flag. And if so might it still be worth it to file it anyway? If it came under audit would the client's purchase invoices not be rock solid substantiation?

What are your thoughts on this?


(Granted, it's not often that i have the opportunity to get involved in a 'start up.' I'm usually brought on 'after the fact.' Later down the road he/we may wish to register him as an LLC -- we can decide this next year in 2010.)

(I don't yet know whether his vehicle would qualify as business use vehicle or be subject to passenger vehicle limitations. I'll look at that later.)

[Dusty2004]

Startup costs?

If he has no revenue and no jobs that he is working on now (just looking for work not actually started any yet) I would say they are startup costs to be amortized.


Dusty

[tacks]

Thanks Dusty!

[tacks]

OK, i now see that IRS Publication 535 addresses this directly. Thanks again, Dusty.

(yes, i'm a bit embarrassed for not knowing this. but far better i get 'schooled' here and now versus by an IRS agent later down the road)

[ChEAr$]

It all revolves around just when he is "open for business" and one must look to the
facts and circumstances.

For example I started years ago in this business, organized with startup date of
Nov 15 to allow plenty of time to get ready for tax season. The fact that I had an
office, utilities on, business license and a sign out front advertising "open for
business" meant form 1065 for that year although we had no revenue.

But for a fellow who merely buys equipment in preparation and does not use said
equipment before Jan 1st, he can't claim section for such not placed in service,
right? And if he has no appropriate business licenses.... well.....!

But if he has required licenses and does or starts on one job before 12/31, he's
in business.

[tacks]

Thanks very much, ChEA. It's important that i know this sort of thing before meeting with a potential client.

Your last comment leaves me wondering if it would behoove him/us to try to get 'open for business' before year end. (And i do NOT mean that i would suggest he do anything unethical -- NOT worth it. Rather would it behoove us to proceed on legitimate business activities.)

[ChEAr$]

Thanks very much, ChEA. It's important that i know this sort of thing before meeting with a potential client.

Your last comment leaves me wondering if it would behoove him/us to try to get 'open for business' before year end. (And i do NOT mean that i would suggest he do anything unethical -- NOT worth it. Rather would it behoove us to proceed on legitimate business activities.)

Too many times a client thinks he is better off thinking only of tax considerations
to the detriment of sound business planning. You didn't say what kind of business,
or not that I remember, but he shouldn't want to go out and find just any old customer and in hurrying the process do a bad job in starting his business.

A well thought out business plan, even if not in writing, goes a long way.
Dot all the i's and cross all the t's and take things logically.
You job here is to coax him in making logical and sound business decisions.

[tacks]

Too many times a client thinks he is better off thinking only of tax considerations to the detriment of sound business planning. You didn't say what kind of business, or not that I remember, but he shouldn't want to go out and find just any old customer and in hurrying the process do a bad job in starting his business.

A well thought out business plan, even if not in writing, goes a long way.
Dot all the i's and cross all the t's and take things logically.
You job here is to coax him in making logical and sound business decisions.

Thanks again, ChEAr$.

Unfortuanately i'm often stuck with the type of clients who NEVER think of tax consderations. I find this fellow to be a refreshing change.

I've grown very cautious about what kind of info i put out there on the web -- even when using a fake name. But that's another story.

He is in the businesss of 'mortuary transport.' He works with funeral homes. Based on what he's told me thus far i don't see how him getting some work before year end could pose any kind of problem. I don't see how that could detriment his business plan (which he does have, btw.)

[JohnH]

"Mortuary Transport" - sounds like a dead business to me...

[tacks]

[in all seriousness i would appreciate help on this. i really wish i had more opportunities like this coming my way.]

[JohnH]

If he's up & running and ready for business, then he might wish to approach a few potential customers and offer to provide services on a one or two time basis at a deeply discounted price, provided it's completed & paid before year-end. (I'm assuming he will be a cash-basis taxpoayer). The industry is very price sensitive and a discount might just be what he needs to get his foot in the door.

He could be up front and explain that his purpose is twofold: 1) to show them how he can beat his competition and 2) because his accountant said he needs to book some business before year-end for tax related reasons. Most business operators would jump at a discount (all other things being equal), plus everybody likes the idea of saving taxes, even when it's somebody else who's doing the saving.

A discounted service or two might help head off the potential cost of an audit, plus it helps him hone his negotiating skills. He will need them in this business because in the funeral industry everything is negotiable.

[Davc]

But if he has required licenses and does or starts on one job before 12/31, he's
in business.

It's not required that he start a job. He just needs to be seeking work if he has everything in place to start a job if one is offered.

[ChEAr$]

It's not required that he start a job. He just needs to be seeking work if he has everything in place to start a job if one is offered.

Correct on that point, but proving a job is easier than proving looking for a job.
In case of audit of course. (grin

[PIGLEE]

"Mortuary Transport" - sounds like a dead business to me...

But people will be dying for his services!!!

My Dad was a mortician, can't resist.

[Black Bart]

"I SWEAR I was lookin' for work."

Originally Posted by Davc
It's not required that he start a job. He just needs to be seeking work if he has everything in place to start a job if one is offered.

Correct on that point, but proving a job is easier than proving looking for a job. In case of audit of course. (grin

Good point ChEAr$, however there IS precedent; to wit: Former President George W. Bush (in re his meeting with Russian Prime Minister Putin): "I looked the man in the eye...I was able to get a sense of his soul."

Armed with this (pick one) cite/fig leaf, our "brass" tacks colleague could state with firm conviction to an auditor: "I looked my client in the eye...and I was able to get a sense of intent to find work."

Sorry. Like Piglee -- it's just too good to resist.