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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 2557
Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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I received a large amount of valuable gemstones through a

Customer Question

I received a large amount of valuable gemstones through a lawsuit. I sat on these stones for a while, and then I determined to sell them for a profit. I registered a company for such with NY State, in 2012. I used my cost in obtaining the stones as the basis of filing a Schedule C with the IRS in 2012, and claiming that these costs were deductions.IRS had audited me, and they say that I cannot use all these costs as deductions for the 2012 return. They suggest that the acquisition costs should be amortized in some way.What does the tax law say about this situation?
Submitted: 6 months ago.
Category: Finance
Expert:  emc011075 replied 6 months ago.
Hi. My name is ***** ***** I will be happy to help you. First, you shouldn't use Schedule C. Schedule C is used when you actively participating in generating income. The sale should have been reported on schedule D. What IRS is referring to is start up cost and that's only apply if you run a business.
Customer: replied 6 months ago.
What deductions can I get with the Schedule D, for 2012 and going forward? And I was actively in participating in generating income in 2012, when I filed the Schedule C. So I believe that it was correct to file a Schedule C.
Expert:  emc011075 replied 6 months ago.
Were you actively buying and selling Gemstones? From what you are describing I understand that you sold the gemstones, not that you were in business of buying, selling or reselling it.
Customer: replied 6 months ago.
I was in the business of selling them. I was at that point doing marketing reseach and making selling contacts. I also attended a large gem show, in furtherance of sales.
Expert:  emc011075 replied 6 months ago.
Ok. In that case your gemstones are considered your inventory and the cost is not deductible until sold. You need to know value of your inventory at the beginning of the year and at the end of the year, plus purchases you made. All other expenses will be operational expenses (utilities, rent and such) Up to 5K of your start up expenses can be deducted on the first year of business, the rest will have to be amortized over 15 years.
Expert:  emc011075 replied 6 months ago.
In that case you will need to amend your return and redo you Schedule C. Remove to cost from deduction for the gemstone cost and claim it as material or supplies or other costs (line 38 or 39 - it will make no difference). All expense you had before you business was up and running will be considered start up expenses, and you can deduct up to 5K of start up expenses on your 2012 return (assuming you didn't have more than 50K). The remaining start up expenses will be depreciated/amortized (same form, just different type). All expenses you had AFTER your business was up and running can be deducted as current expenses.

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