New Business

[DA_New]

I, like a lot of people, started my own business in 2020, trying my hand at it. I recently decided to make it official and am in the process of getting an EIN. I  know that this term's tax filing is over so I wanted to know:

1. Can I deduct the start-up expenses starting from 2020 next year or is it too late? I started buying products for it in 2020 using my stimulus money.

And 2:  Would I be better off using a professional to fill out my taxes for me?

[LudwigVan_fan · Accepted solution]

1.  Startup costs must be claimed in the year you started the business.  You can amend your 2020 return and put the business and startup cost on that return.

https://www.irs.gov/pub/irs-pdf/p583.pdf

2.  Yes, I think since 2020 and 2021(?) have been filed, I would consult a professional to determine what costs are capitalized and what can be elected to be claimed immediately.  Also, they could prepare and amend 2020 for you and if necessary 2021.

[DA_New]

Thanks a lot! I had a feeling but wanted to be sure before I made any mistakes. And I hadn't filed this year because I wanted to get my EIN but see that it was a mistake on my part. Thank you again!

[leeloo]

Two side points. The IRS expects ytou to show a profit from 3 out of every five years. If 2021 is year two and you still have no income, you can realistically expect one more year before the IRS may start looking at this as a hobby. Aslo, unless you have employees, you don't need an EIN.

[tagteam]

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@leeloo wrote:

The IRS expects ytou to show a profit from 3 out of every five years.

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The IRS has no such expectation. 

Section 183(d) of the Code creates a rebuttable presumption that an activity is engaged in for profit:

If the gross income derived from an activity for 3 or more of the taxable years in the period of 5 consecutive taxable years which ends with the taxable year exceeds the deductions attributable to such activity

Although the IRS can rebut the aforementioned presumption at any time, the presumption actually works in favor of taxpayers.

[LudwigVan_fan]

@tagteam In my 30 years of experience auditing returns, setting up a Section 183 issue is a difficult job.  If I recall correctly, I audited and set up the issue 2x.  The first was early in my career.  It went to tax court.  The Govt won the first couple of years, and the TP won after that.

The 2nd time I thought was a "perfect" case.  Over 20 years of continuous losses.  Even operating at full capacity, losses were still occurring.  Issue went to appeals.  The appeals officer was retiring, and to clear his desk, many cases were conceded, including this one.

Thus, if a profit is shown once in awhile, I doubt an issue would ever be set up.

But, that's my opinion, not fact.

[tagteam]

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@LudwigVan_fan wrote:

Thus, if a profit is shown once in awhile, I doubt an issue would ever be set up.

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I agree and have been involved in three instances one of which was a clear loser (years ago). I informed the guy who set up a shop for his wife to sell artificial flower arrangements (and other junk) to just bag it. One sticking point was that she was never there or spent any time on it and the other was this guy had a separate business that generated a 7-figure income. 

The other two involved S corporations and, conversely, were clear winners despite consecutive years of losses. No one operates the likes of a plumbing supply company or a medical claims recovery service, working 50-60 hours per week, as a hobby.

[leeloo]

There's a little more to it. I'd rather a taxpayer be aware of the pitfalls than have a nasty surprise.

If the taxpayer meets the presumption rule, the Service can still argue that the activity is not
engaged in for profit; however, the burden of proving that the activity is not engaged in for profit
shifts to the Service. In addition, examiners cannot use IRC § 183(d) as the sole basis for disallowing losses under IRC § 183 even if it is shown that the taxpayer has not met the presumption rule. 

https://www.irs.gov/pub/irs-utl/irc183activitiesnotengagedinforprofit.pdf

[tagteam]

I concur with your recent post, but in your earlier post you wrote that the IRS "expects" taxpayers to "show a profit from 3 out of every five years", which is far too broad of a statement and inaccurate.