Business Loss

[GTS1101]

I have a client who tried to start a daycare business in 2005. She went out and bought a computer, toys, furniture, crib, etc. The business never got started. She had to go back to work full time to survive. Her intention was to do the business that is why she made the investment but it didn't work out. Can she deduct these expenses as a total business loss in 2005? And if not is there anything else she can do to recoup her costs?

Thanks,

GTS1101

[Uncle Sam]

Business Loss

If the stuff wasn't used - couldn't she have either returned them or donated them to a charity?
So long as you can establish that there was bonafide business intent to operate a business, I would take it as a short term capital loss.

[jainen]

What happened

What happened to all those things? They are capital assets, subject to gain or loss on disposition.

[Bees Knees]

TTB, page 8-18, "Costs incurred in an attempt to acquire or begin a specific business are capital expenses and can be deducted as a capital loss."

This assumes your client did not convert anything to personal use property. If the taxpayer uses any of the assets that were purchased for any purpose, there is no capital loss to deduct because the asset has not yet been disposed of. And if it is placed into service as a personal use asset, then you cannot deduct a loss even if it is later disposed of.

[Unregistered]

Issues like this are always a close call. I do not disagree with what Bees wrote about specific business but GTS may want to read Rev Ruling 77-254. It has a discussion on this area. This is the "headliner" for the Rev Ruling - go to www.taxlinks.com & you can read the entire ruling.

Losses; attempted acquisition of business. An individual may deduct, in accordance with section 165(c)(2) of the Code, expenses incurred in the unsuccessful attempt to acquire a specific business, such as legal expenses incurred in drafting purchase documents. However, expenses incurred in the course of a general search for or preliminary investigation of a business, such as expenses for advertisements and travel to search for a new business, are not deductible. Rev. Rul. 57-418 amplified

Sometimes a tough call to determine when you go from preliminary to specific.

New York Enrolled Agent