How should business expenses for a garage app startup be handled?

[thomas2]

Situation: I've left a corporate job and spent the whole last year developing apps. The goals was to give the apps for free away in the app store to get traction. Once it has traction, the goal was to sell the apps. Because apps are hit and miss, I developed a series of apps to see which one would catch on. None of the apps has made any money.

I have expenses for:

- Software subscription licensing, e.g. Adobe Cloud

- Contractors that I hired through upwork.com: Marketing, design, and writing experts.

- Advertising costs: Convention booth, Facebook ads

How do I declare those expenses and get the most tax benefit out of it?

I've read about the difference between startup costs and operation costs. Usually the dividing line is the day that the business opens for business. One interpretation is that my business efforts never opened for business because I didn't try to charge any money. (Selling successful apps would be the monetization.) Another interpretation is that as soon as I published the first app in the app store, although free, I was open for business.

Are these expenses startup costs or operational costs?

I'm fine and actually super heavy if I get pointed to a dense article. I don't need it simplified and love to really understand an issue.

[AmandaR1 · Accepted solution]

I would say it sounds like your business has "started." 

You don't need to have earned money to have started the business. Compare your situation to a physical store. Once it's doors are "open for business", startup costs and all business expenses are deducted, regardless of income. Because your marketing plan is in affect and you are acquiring customers; I would say you are in business. It's part of your strategic plan to not charge for your services until you build an audience/traction.

I would recommend choosing whether you want to have "started" or not and then document your business plan and how this activity fits into your determination, showing you have started your intended business operations. As far as which is most advantageous, normally deducting expenses is more beneficial than startup costs, in the current year. 

A business loss will offset all other income and can create a Net Operating Loss on your personal return. This loss can be carried back 2 years and then forward 20 years tax, which means you can immediately amend your prior two year returns to offset taxable income for refunds. Alternatively, you can elect not to carry a loss back and only carry it forward. 

As for the difference between startup & organizational costs:

• Organizational costs are only costs related to forming a legal business entity
• Startup costs are costs that would normally be deducted as business expenses. All of your expenses listed look like start up costs, which would be deducted as business expenses if your business has started it's intended operations. 

For more information on business expenses and startup & organizational costs (chapter 7), see IRS publication 535 Business Expenses here: https://www.irs.gov/pub/irs-pdf/p535.pdf

[gehinious]

Here is a good article.  Scroll down for "When does a business begin.:

https://www.mileiq.com/blog/business-startup-costs-deduction/

So, just when does a new business begin? The courts have held that a new business begins for tax purposes when it starts to function as a going concern. It also must start performing the activities for which it was organized. (Richmond Television Corp. v. U.S., 345 F.2d 901 (4th Cir. 1965).)

The IRS says that a venture becomes a going concern when it acquires all the assets necessary to perform its intended functions. It must also put those assets to work. Your business begins when you start doing business, whether you are actually earning money.

For example, if your business involves providing a service to customers or clients. This includes accounting, consulting, financial planning, or law services. Your business begins when you first offer your services to the public. No one has to hire you; you just have to be available for hire. For example, a consultant’s business begins when he or she is available for hire by clients.