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If this business was a true business, then yes - you can deduct the startup costs as a capital loss on Schedule D of your 1040.
However, the IRS has a habit of claiming that failed businesses were really hobbies, and if they rule that your business was a hobby the hobby loss rules would prevent you from deducting any losses, because you have no revenue.
You can read about what the IRS says about businesses vs hobbies by clicking HERE.
A good article on this topic (failed businesses) can be found, HERE
Yes, the intent was for it to be a true business to make money. So I do believe it would not be a hobby.
Okay, if that is the case then you would be able to take a capital loss
Would this all get deducted on Schedule D in the year it was determined the business failed, i.e. year 2?
Yes, it would be the year the business failed
Do you have further questions about this?
One more question - if some expenses were paid in year 1 and some year 2, is it all reported as one loss, with the initial date money was spent, or is it separated out into when expenses were paid - i.e. some may be long term and some may be short term.
It is all treated together. It's a capital loss, though so it doesn't matter if it's short or long term
the loss is still treated the same.
Is there anything else you need assistance with?
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Ok thank you.