You will file business income on Schedule C of your Form 1040, yes. Should you create a business such as a corporation, or you take on partners, you might end up filing different returns (1120 is for C-Corporations, 1120S is for S-Corporations, and 1065 is for partnerships).
There are rules for capitalization that you should follow. Some assets must be depreciated or amortized over time. Your prototype is typically one of them. In addition, there is such thing as business start up and organizational costs with limits, plus the tax law recognizes research and development costs too (possible tax credit).
It would not be prudent to do a full out tax planning session for you here in the answer to your particular question, but I typed the above to make you more attune. In the end, yes, you have a deductible expense.
Let me know if there is something more I can clarify though.
Thank you for your question.
So you're saying I can file sched C on 1040, take deductions where possible (depreciate where necessary) etc.
Can I go back to prior years expenses e.g. say attorney fees for consultation on patent, or say a subscrption to an online cloud project managment service at $25/mo over the course of two years in 2008 and 2009?
And , say in 2010 start the business e.g. llc?
The attorneys fees should likely be amortized after first being capitalized, yes. You can start amortizing now, but unless you amend your prior year returns or change from what is called an 'impermissible method' to a 'permissible method' using Form 3115 in the current year (thus taking a Section 481(a) adjustment if I recall The Section correct off the top of my head), you will lose out on your initial amortization deduction. The Form 3115 route is difficult technically speaking, and requires that you file with the Commissioner an automatic change, so I would probably just use 1040X to claim prior year refunds (you can get refunds going back to three prior years in general, at the federal IRS level, whereas states have different limitation periods sometimes).
I would lean towards putting the subscription on Schedule A instead of Schedule C perhaps, but you can get aggressive there if you like based on personal facts and circumstances.
When you file an LLC does not matter as to whether or not you have started business. When you actually start business and/or incur start-up and organizational costs is when the record keeping and reporting starts for Schedule C. You will report on Schedule C with a single-member LLC in the absence of an election not to (ie, S-Corporation election using Form 2553 after you get an LLC), and LLC's are disregarded entities for IRS purposes having been created by the states, so the IRS could care less in general if you have an LLC.