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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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Myself and another person recently started a company (LLC).

Customer Question

Myself and another person recently started a company (LLC). Each of us contributed $3000 in start up costs. Will I be able to take a $3000 deduction on my 2008 tax return? Or, is this considered non-reimbursed business expenses and therefore is a function of my income with regard to any tax breaks?
Submitted: 5 years ago.
Category: Tax
Expert:  Lev replied 5 years ago.

Start-up cost - expenses you had before the business started - in general should be amortized over 15 years - thus in the first year you will deduct 1/15 part of the total expenses - and so on in following years.

 

You can write off up to $5,000 in startup costs and another $5,000 in organizational expenses in the year that you start your business and only if the business has a profit.

 

If you haven't started the business yet - you may not deduct any start-up cost.

please see more details in the IRS publication 334 - http://www.irs.gov/pub/irs-pdf/p334.pdf

 

If an LLC does not File Form 8832, it will be classified, for Federal tax purposes under the default rules. The default rules provide that if the LLC has at least two members and is not required to be classified as a corporation, it will automatically default as a partnership, and be required to file a partnership return - a Form 1065 . Each owner should show their pro-rata share of partnership income (reduced by any tax the partnership paid on the income), credits and deductions on Schedule K-1 (1065), Partner's Share of Income, Deductions, Credits, etc.

 

Customer: replied 5 years ago.
Our business never really got started. We both invested 3K and my partner pulled out for financial reasons. So, I guess the business was not profitable as we never had any income. Does this mean that I must amortize my losses over 15 years?
Expert:  Lev replied 5 years ago.

I am sorry - but if the business was not started - you may not deduct any of start-up costs.

 

Start-up cost is considered your investment. If you sell the business before deducting all of the start-up costs, you would be able to deduct the remaining start-up costs as a loss as allowed by Sections 165 and 195(b)(2).

 

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22704
Experience: Taxes, Immigration, Labor Relations
Lev and other Tax Specialists are ready to help you
Customer: replied 5 years ago.
I think I might have mispoke. The business was legally started and has a tax id number. We just did not make it to the point where we had customers. Maybe that is still what is legally considered as not started?
Expert:  Lev replied 5 years ago.

"The business was legally started" - might mean that you register business - but it doesn't necessary means the business started operations.

The primary indication the IRS uses to determine if the business started operating - if the business has positive gross receipts.

But even if your business has zero gross receipts - it still may have started to operate, but in case of audit - you might need to proof that.

For instance, if that is a manufacture business - and you started production process, but have not sold anything else - the business is considered as started.

Another example - if you are a real estate agent - and have contracts with customers to sell or purchase properties - even you did not receive a penny - the business might classified as started.

However - if you just register the business and do nothing else - even the business legally exists - it has not started to operate.

 

To be able o deduct start-up expenses - the business operations should been started and the business should have net income.

 

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