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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 10173
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I took money from my savings account to finance an invention

Customer Question

I took money from my savings account to finance an invention that is coming on the markt. How much is deductible on my investment and how much taxes do I have to pay on th borrowed amount
Submitted: 12 months ago.
Category: Finance
Expert:  Lane replied 12 months ago.

Hi,

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I hold a JD (Juris Doctorate, a doctoral degree in the law), concentration in Tax Law & Corporate law, an MBA (specialization in finance & tax), and BBA from Mercer University's Stetson School of Business and Economics, as well as CFP and CRPS designations.

I can help here

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Expert:  Lane replied 12 months ago.

First, a quick question ... Was the account you pulled from a qualified retirement plan (such as a 401(k) plan or an IRA)?

Expert:  Lane replied 12 months ago.

OK I still don't see you coming back into the chat here, so I'll try to provide some general information

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First the easy part. If you simply pulled money from an individually owned account (as opposed to an IRA or 401(k) or pension, that's not a taxable event ... you're simply using dollars that have presumable already been taxed. The only loss there (all other things being equal) is the loss of growth or interest on the money

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If you actually BORROWED funds from a lender and you did put that money to work in pursuit of a profit through this invention then the interest on that loan is deductible AND the borrowed funds are NOT taxable (because, of course you have to pay the money back, it's not INCOME to you)

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Now the question about what is deductible depends on how you set yourself up ... Investing money in an invention or any other venture for that matter is typically not a deduction, but rather a capital investment that will lower you gain when and if you sell, but doesn't generate and immediate tax savings.

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Many times this investment (depending on they way the asset is classified) can be depreciated over time so that each year you get a deduction, spreading out that expense over the life of the asset.

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If you set yourself up as an inventing BUSINESS, then there CAN be some startup expenses deducted before the businessd actually starts ad then ongoing deductions of running that business once the business begins

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From an excellent piece on this from the attorneys at Nolo.com:

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"Start-up expenses are expenses you incur before you actually begin your invention business. Unlike business operating expenses, start-up expenses cannot all be deducted in a single year. This is because the money you spend to start an inventing (or any other) business is a capital expense -- a cost that will benefit you for more than one year. Normally, you can’t deduct these types of capital expenses until you sell or otherwise dispose of the business. However, a special tax rule allows you to deduct up to $5,000 in start-up expenses the first year you are in business, and then deduct the remainder, if any, in equal amounts over the next 15 years. (IRC Sec. 195.)

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Start-up expenses include any costs you could deduct once your business begins -- for example, license fees, fictitious business name registration fees, advertising costs, attorney and accounting fees, travel expenses, market research and office supply expenses. They do not include currently deductible research and experimentation expenses. The cost of longterm business assets is also not a start-up cost -- these costs are either expensed or depreciated once the business begins."

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At on time we had to send in a separate statement withyour tax return to claim start-up expenses.

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Now, you're automatically deemed to have made the election for the first year of business. Just list your start-up costs as “Other expenses” on your Schedule C (or other appropriate return if you are not a sole proprietor). You don’t have to specifically identify the deducted amounts as start-up expenditures for the election to be effective.

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Now, if you don’t want to deduct your start-up expenses the first year, you can forgo the deemed election by simpy not TAKING the deduction ... and as I mentioned earlier, these costs become part of the tax basis of your business. This can be a excellent idea if (1) you don’t expect your business to earn a profit for a few years OR (2)if you want to reduce your deductions in order to show a profit, (say, for investors)

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I hope this helps

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If you can give me more detail I can answer more specifically

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let me know ... I'll be here

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If this HAS given you enough, (and you DON'T have additional questions) I'd appreciate a positive rating (using those stars on your screen) ... that's the only way we're credited for the work by JustAnser

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Thank you,

Lane

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