New business - expenses with zero revenue

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oaks
Posts: 42
Joined: Wed Jan 31, 2018 11:47 am

New business - expenses with zero revenue

Post by oaks » Wed Oct 10, 2018 6:25 pm

I am starting a new business that will have around $75,000 worth of expenses prior to a single dollar of revenue. These expenses include traveling to conferences, attorney, marketing, etc etc etc.

The issue is that I anticipate that of the $75,000 startup costs there will be around $40,000 incurred this 2018 tax year and the remainder in 2019 with maybe a small amount of revenue in 2019 but certainly not over $75,000.

I have other schedule E income, W2 income, etc for 2017 but I'm not sure if the losses associated with this new business would reduce my personal income tax situation or if the losses are simply carried over into future years to offset gains of the new business.

Anyone comments, suggestions or guidance? I would imagine there is some IRS publications about this but I believe there would be a significant amount of nuance associated.

PolarBearMarket
Posts: 42
Joined: Thu Sep 13, 2018 11:52 am

Re: New business - expenses with zero revenue

Post by PolarBearMarket » Wed Oct 10, 2018 6:57 pm

It's possible to deduct the $75K against your personal income if you own the business. However, suddenly claiming $75K in business expenses with no revenue as a personal income deduction is a surefire way to trigger an IRS audit. Given this, it's worth consulting a tax professional familiar with small businesses if that's your plan.

It's probably also worth consulting a tax professional if you plan to carry-forward the losses, e.g. if you form an LLC. So professional help either way IMO.

fabdog
Posts: 322
Joined: Wed Jan 16, 2013 1:59 pm
Location: Williamsburg VA

Re: New business - expenses with zero revenue

Post by fabdog » Wed Oct 10, 2018 7:18 pm

you can only deduct a small amount of the expenses you incur for starting up the business (pre revenue or open for business)

a summary

https://quickbooks.intuit.com/r/taxes/3 ... usinesses/

IRS pub 535... go to the start up section...

https://www.irs.gov/publications/p535

Mike

oaks
Posts: 42
Joined: Wed Jan 31, 2018 11:47 am

Re: New business - expenses with zero revenue

Post by oaks » Fri Oct 12, 2018 12:23 pm

Thank you fabdog and PolarBearMarket. Anyone else have any comments or actual real life experience with this?

bhsince87
Posts: 1903
Joined: Thu Oct 03, 2013 1:08 pm

Re: New business - expenses with zero revenue

Post by bhsince87 » Fri Oct 12, 2018 12:41 pm

Deducting start up costs is very complicated. I've been through it once with an ebay business and I'm close to doing it again for another side business.

If you are starting a legitimate business, some costs can be offset against non-business income. But as mentioned in the first lined article in the previous response, the dollar limits are pretty low.

The remaining costs must be amortized, and this is where things can get tricky. The IRS general guideline for a "real business" is that it should be profitable 3 out of 5 years. There is someflexibility here, especially for start ups.

But if you are too aggressive in your start up amortization, you can make it very difficult to show profits in later years.

You definitly need a good business plan in place, and have it blessed by a tax professional before you go this route.

On the plus side, after the business is up and running, these costs can usually be deducted in the year they occur. So my strategy has been to keep start up costs to the barest minimum and wait until the business is up and running before I hit it with a large bill.
Retirement: When you reach a point where you have enough. Or when you've had enough.

oaks
Posts: 42
Joined: Wed Jan 31, 2018 11:47 am

Re: New business - expenses with zero revenue

Post by oaks » Mon Oct 22, 2018 1:06 pm

bhsince87 wrote:
Fri Oct 12, 2018 12:41 pm
On the plus side, after the business is up and running, these costs can usually be deducted in the year they occur. So my strategy has been to keep start up costs to the barest minimum and wait until the business is up and running before I hit it with a large bill.
I generally agree, however is an opportunity exists it may be better to go all out as getting into the market fast is better than any potential tax savings. This is where it confuses me. I suspect it will take $75k+ to get an initial software prototype, advertising and marketing. I can't skimp on any of it.

fabdog
Posts: 322
Joined: Wed Jan 16, 2013 1:59 pm
Location: Williamsburg VA

Re: New business - expenses with zero revenue

Post by fabdog » Mon Oct 22, 2018 2:13 pm

Well, based on what you wrote, since your 20178 expenses would be ~ $40K, depending on the category, you could deduct as much as $10K of that, and capitalize the rest over 15 years.

The balance you spend in 2019 you can net against your income, assuming you have some in 2019. If you are not sure you will have income in 2019 (not a profit, but money coming in the door) then it will be very risky to deduct expenses in 2018

And then you should be making profits in 2020, or 2021 at the latest... showing 3 straight years of losses invites the IRS to scrutinize as a hobby not a business

Mike

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