Business Startup - Or Maybe Not

[JohnH]

When people decide to create a mess, they generally succeed.
This guy outdid himself.

Client has a full-time job NOT in the real estate business.
He and a friend decide to get rich flipping houses.

On March 10, 2013 they EACH pay (from personal funds) $12,000 to attend a seminar to learn how easy it is.
Then on March 20, 2013 they form an LLC.
They never open a bank account in the LLC's name, don't obtain a Fedral ID number, or do anything else to perfect the filing.

Over the next few months they pay about $1,000 for web site design, business cards, etc for the LLC.
This is all paid from personal funds (remember, the LLC never opened a bank account)

Turns out it's harder to do this than just paying fees to consultants and advertisers - somebody has to do some work.
They never buy a house (thank God), and of course they never sell anything.
Then on Oct 15, 2013 they give up and dissolve the LLC.

So now he wants to know how much of his "loss" he can deduct.
I thought I'd toss this out for any quick suggestions, if anyone cares to weigh in.

[ChEAr$]

If we're going to vote on it, mark me down for no deductions, anywhere, anyhow.

[TXEA]

How to get poor quick.......

This sounds like a hobby to me. They did not demonstrate any intent to make a profit nor was there any actual business activity including operating the business under a business checking account or obtaining and EIN for the business.

I would ask the following questions to rule out a loss:

1. How many properties did they try to buy?

2. How many hours did they work in the business - not just talk about it.

3. Did something unforeseen derail the business?

4. Did they have a written business plan?

5. What are their qualifications to engage in this trade or business?

6. Did they secure any required permits, business licenses, DBA registration, etc.

7. Were they adequately capitalized to engage in the business? In other words, after they spent their combined $24,000, did they have any funds left to purchase properties?

8. Did they have the time to engage in the business?

The above will most likely rule out the possibility that this was a legitimate business.

[TXEA]

Since we are voting, I vote no loss

[JohnH]

I see we are all thinking along the same lines.
I was beginning to think I'm just getting too old and cynical.
(Well, half of that is right).

I do like the questions - reminds me of the line in "The Life and Times of Judge Roy Bean" when he says to the rustlers, "You boys got anything to say before we give you a fair trial and then hang you?"