Active Trade or Business

[gomezjrs]

How does the IRS define "active trade or business"? In my laymen opinion that could be before the "doors open" or before having any revenue in some cases. The information below provides no clear definition of when an active trade or business begins. How do I find "such regulations the Secretary may prescribe"?

The real question here is can I deduct startup costs for a business that will not open it's doors for another year or two but I am very much actively involved in?

IRS Code section 26 USC 195: Start-up expenditures states:

(2) Beginning of trade or business
(A) In general
Except as provided in subparagraph (B), the determination of when an active trade or business begins shall be made in accordance with such regulations as the Secretary may prescribe.

(B) Acquired trade or business
An acquired active trade or business shall be treated as beginning when the taxpayer acquires it.

[LeticiaF1]

Sometimes starting a business takes a lot of time, work, and money.  Here are the answers to your questions:

1. Being active in a business, means that you are involved in daily activities.  You put your time and work into the business not just your capital. 
2. Regarding your question about when a business starts, it starts when you are operational, when you begin providing goods or services to your customers when you start generating income.  
3. Timing is important when claiming start-up expenses, you can't claim them until your business starts and it is operational.  

If you would like to see more information about Start-ups, see the TurboTax help article below:

Start-up Business Tax Tips

Start-up expenses have to be amortized with a recovery period that starts with the month the business begins to operate active trade or as a business.  See the following IRS page for more information on deducting start-up expenses. 

Here’s how businesses can deduct startup costs from their federal taxes

Feel free to reach us again if you have additional questions.  

[Edited 3/23/24 | 5:25AM PST ]

[gomezjrs]

Thank you for the response, Leticia. Number one is certainly true. Can you point me to any IRS publication or code section that supports number two and three? I would love to know where this is defined.

[RobertB4444]

The IRS has a guide for people starting new businesses with a whole series of articles.  They are all right here.

@gomezjrs 

[gomezjrs]

This looks like a great resource, thank you for sharing. However I don't see where it addresses my specific question. Are you seeing it there and I am just missing it? If so can you point me to where exactly?

[RobertB4444 · Accepted solution]

Your business is assumed to have to be a 'going concern' in order to be able to take deductions.  The IRS hasn't ever really defined what an active business is because it's so different from business to business and they take it on a case by case basis.  But they are clear on what start up costs are.  

Those are the costs before your business is active and they have to be amortized over time.  Here's the info on that.  If you want to say that your business is active it is up to the individual business owner to prove that they are.  But if the IRS asks you to demonstrate that you were attempting to operate the business for the business purpose that you've stated that you are running.  If you sell widgets and you can't show that you're trying to sell widgets then the expenses are start up expenses.

@gomezjrs