Sole Proprietor Startup Costs Carryover?

[gregt75]

I have client who is a sole proprietor who started his business in 2012 but received no income. It is my understanding that all his start-up costs could be put on his 2013 tax return since he received no income in 2012. His start-up costs include a computer, business cards, registering his business, website registration, computer training, reference books, etc. Is this correct with regards to carrying this over to his 2013 return when he expects to make money? Please advise. Thanks.

[mactoolsix]

You can defer the Election

According to Pub 535:

You can choose to forgo the election to amortize by affirmatively electing to capitalize your start-up or organizational costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins.

http://www.irs.gov/publications/p535/ch08.html#en_US_2011_publink1000208952

Mike

[smithtax]

Agree with mactoolsix.

See also Reg Sec 1.195-1(b).

[gregt75]

Thanks. He can also elect to deduct all the 2012 expenses upfront if they are under $5000 on his 2013 tax return, right? Also, what constitutes when an active trade or business begins? Can I assume it starts when they first receive revenue?

[Traveling EA]

Thanks. He can also elect to deduct all the 2012 expenses upfront if they are under $5000 on his 2013 tax return, right? Also, what constitutes when an active trade or business begins? Can I assume it starts when they first receive revenue?

I think it would be when ever they open the doors for business, even if there is no revenue for a little while. A cash basis Sch C, could have a/r, but no 'cash receipts', but would in effect be in business.

[gregt75]

I think it would be when ever they open the doors for business, even if there is no revenue for a little while. A cash basis Sch C, could have a/r, but no 'cash receipts', but would in effect be in business.

It is a services firm. They had no customers in 2012. They were just getting the business ready by registering it and creating the website and business cards along with buying a computer. They anticipate getting customers this year.

[Lion]

Were they ready to do business? If a customer appeared, could they have serviced that customer (had any required licenses, etc.)?

[gregt75]

Lets say they were ready to do business but had no customers. I thought they could not claim a net loss without any revenue. Please advise. Thanks.

[Kram BergGold]

Wrong

You do nto need income to be open for business. You are open when there is the possibilty that a customer will show up and you can service them.

[gregt75]

Ok, so then my client can report all his expenses including start up expenses on his 2012 return and I guess input zero for revenue, right?

[dodgedipduck]

I have client who is a sole proprietor who started his business in 2012 but received no income. It is my understanding that all his start-up costs could be put on his 2013 tax return since he received no income in 2012. His start-up costs include a computer, business cards, registering his business, website registration, computer training, reference books, etc. Is this correct with regards to carrying this over to his 2013 return when he expects to make money? Please advise. Thanks.

The business start date is not dependent on when the first revenue comes in.

An example is a retail storefront. The business starts the moment the doors are opened for the Grand Opening. The business is operating regardless of whether they sell anything. It's not as easily defined in many cases. Courts say when you have the assets and systems in place and you begin sales activity, your business has started.

[dodgedipduck]

I disagree

You can defer the Election

According to Pub 535:

You can choose to forgo the election to amortize by affirmatively electing to capitalize your start-up or organizational costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins.

http://www.irs.gov/publications/p535/ch08.html#en_US_2011_publink1000208952

Mike

You can "forgo" the election. That is not the same thing as deferring the election. If your business has started, you can forgo (abandon) the election to amortize costs, but you cannot "defer" the election to take at a later time.

[dodgedipduck]

Ok, so then my client can report all his expenses including start up expenses on his 2012 return and I guess input zero for revenue, right?

No. The election to deduct the $5,000 of start-up costs must be made on a timely-filed return (or an amended return within six months of the original due date). If your client's business started in 2012, the default rules of a 180-month amortization period apply.

[gregt75]

No. The election to deduct the $5,000 of start-up costs must be made on a timely-filed return (or an amended return within six months of the original due date). If your client's business started in 2012, the default rules of a 180-month amortization period apply.

It would be timely since all the start up costs occurred in 2012. The start up costs are around $1000. He rather deduct them all now than amortize them since they are under $5000.

[dodgedipduck]

It would be timely since all the start up costs occurred in 2012. The start up costs are around $1000. He rather deduct them all now than amortize them since they are under $5000.

You're right. I had a one-year brain shift.