This just came up the other day.

One of our clients started a business this year and still has yet to earn its first dollar.  Oh, they’ve set up systems, marketed the concept, etc.  So, they weren’t going to file a tax return, since they had no revenue.

Except there is a provision in the tax law that lets start-up ventures write off up to $ 5000 in qualified start-up costs.   Which would help the founders with their personal taxes.  (The new entity is a pass-through).

That  $ 5000 provision has a few wrinkles though.  If you spend more than $5000, then the rules require the excess to be amortized over 180 months.  (That is the normal depreciation schedule for startup costs.) Oh, and if one spent more than $ 50K in startup costs, there is a dollar for dollar limitation in the write-off.  Which means if one had $ 55K in startup costs, there is no write off allowed.

And, now, there’s more rules to apply.  In Harrison v Commissioner (TC Memo 2022-6), new provisions have been added before one can write off those start-up expenses.  (Actually, they are not new provisions- they reiterate rules that many entrepreneurs attempt to skirt.)

In this case, the startup was a side venture for the taxpayer.  (She was a full time employee of Samsung.)  Her corporate strategy consulting business  was the startup.

She paid a firm to develop her website and to host the site (to build her brand) and she used that site to publish her thoughts on technology trends and developments.  Harrison also bought domain names that were similar sounding to her firm’s brand to make sure folks would always be diverted to her site.

Besides networking, Nicole Harrison effected speaking engagements.  As such, there was travel to New York and Ohio, as well as Atlanta (GA).  And, she renovated part of her rental abode into viable office space (lighting, flooring, cabinetry, etc.).  Of course, there was also a laptop purchase.  As proof of travel, she maintained a automobile travel log, kept the receipts for the rental modifications, as well as the website invoices.  Oh, and, her total revenue for the year was $ 400.

However, the flight expenses did not detail the times, places, or business purposes for the  trip.

Moreover, this was a side business, as I mentioned above.  Which the IRS took to mean this venture was simply an exploratory analysis, and not a true business formation.   The IRS wants to see more than “initial research” or “determination of business potential” to claim a business deduction.

Caveat emptor.

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