startup costs for failed business over several years

[evil_shenanigans]

From 2017-2019, I worked occasionally on a web app intended one day to become a business. During that time I paid several software developers small sums of money (< $5k total) to help out with the project. 

I "opened" the business in 2019, presumably, though that seems like a gray area. The site was live for a while, but I didn't market it so there were very few (< 10) users and no revenue. (There was no method for payment at all built into the site at that time; all accounts were free. I had some ideas for eventually generating revenue but also considered running it as a not-for-profit service.) Hard to say if that constituted "opening" the business or if that was just another phase of development/test. I essentially abandoned the project in 2019; the website stayed up into 2020 but I did not incur any more costs.

I understand that the first $5000 in startup costs can be deducted like ordinary business expenses in the same year as the business is opened. What should I do with these startup costs incurred over multiple years before I "officially" launched in 2019 (if I ever did at all)? (Some of those returns have already been filed; I just want to understand what I should have done here.)

[JeffreyR77]

You  are allowed to deduct the ordinary and necessary expenses you incurred in an attempt to make your business successful. 

Start-up costs are accumulated until the point where you 'go live' . 

In that year you are allowed to deduct up to $5,000 in start-up costs as an expense and amortize the remaining start-up costs over 180 months. 

In the year you shut down the business you would recognize the remaining un-amortized startup costs and would be able to reduce any other income you have.   This will result in a capital loss.

Small Business Start-Up Expenses  

If your business never actually launched, your costs are capital expenses and you can claim them as a capital loss.

How to Treat Cost for Failed Businesses

[evil_shenanigans]

Thank you @JeffreyR77 ! To clarify, then, it definitely seems important whether "the attempt to go into business is not successful" (in your link to IRS Publication 535), as that might determine whether I capitalize the expenses or not. I guess I would consider it unsuccessful, but again it seems like a gray area here as I (arguably) did actually launch and run the site for a while -- just with very few users (and no revenue). Do you happen to know of any additional IRS guidance on that point? 

[JeffreyR77]

No, the guidance is pretty concise.  If you filed Schedule C for a year or two and claimed some start-up expenses and were amortizing the remainder and then shut down the business, you would write off the remaining balance of the un-amortized expenses as capital losses as well so the end result would be the same.

[evil_shenanigans]

Thanks @JeffreyR77 . To clarify, let's say I had something like this:

2017: $1000

2018: $1000 

2019: $1000 (abandoned business)

If I understand correctly, I'm not actually "amortizing the remainder" since the lifetime total is under $5k. But I would take the 2017 and 2018 expenses as ordinary Schedule C business losses, and the 2019 expenses as a capital loss?

Also, when you say "the guidance is pretty concise", that's Publication 535, right? Or is there anywhere else I should be looking for this?

[JeffreyR77]

If you started the business in 2019 and shut it down the same year, the expenses would be $2000 in start-up costs taken as ordinary expenses and $1000 as 2019 expenses.

If you abandoned the business in 2019 without ever starting it, you have a $3000 capital loss in 2019.

The guidance on how to address your expenses is very concise in Publication 535.  There is not a lot of discussion or language to interpret.

[evil_shenanigans]

Apologies for the misunderstanding. My principal confusion here is about the expenses I've *already filed* in 2017 and 2018 as Schedule C ordinary expenses. 

2017: $1000 filed as Schedule C ordinary expenses

2018: $1000 filed as Schedule C ordinary expenses 

2018: $1000 ??? (abandoned without starting business)

If I then abandon the business in 2019, I need to capitalize the $1000 in 2019. But what would happen with the $2000 previously filed as ordinary expenses, which should have been capitalized but were not? I can't find the guidance for that in 535. I suppose I could go back and amend those returns, but obviously in 2017 and 2018 I didn't *intend* to abandon the business in 2019 so it seems Schedule C made sense at that time.

[JeffreyR77]

Your 2017 and 2018 returns are correct. You had no idea you would shut down your business in 2019.  They were ordinary and necessary expenses in those years and fully allowable.

[mk12]

Question!

(sole proprietorship)

In a case where you have $20K in startup costs (labor to develop software), start the business, it fails the first year.  Can amortize $5K in expenses the first year and amortize the remainder over 15 years.  However since the business failed, can you take the full 20K as a captial loss or do you need to amortize the first 5K as an expense and then take the remaining 15K as a capital loss?

If you do take a capital loss, where does it get reported, which IRS form?

[Mike9241]

from IRC 195

(2)Dispositions before close of amortization period

In any case in which a trade or business is completely disposed of by the taxpayer before the end of the period to which paragraph (1) applies, any deferred expenses attributable to such trade or business which were not allowed as a deduction by reason of this section may be deducted to the extent allowable under section 165.

in other words, you deduct the unamortized cost on the final schedule C or on the business return in case you're a partnership, C-Corp or S-corp

[mk12]

What about Pub 535 that states it should be a capital loss?  It seems to conflict, why IRC 195 over Pub 535?

[Mike9241]

your situation seems to be different. you seem to be saying you actually started a business that was unsuccessful the following is for a business that never becomes active.  if you took the $5K deduction and took amortization on the excess you are saying you actually started a business. 

If your attempt to go into business is unsuccessful. If you are an individual and your
attempt to go into business is not successful,
the expenses you had in trying to establish
yourself in business fall into two categories.
1. The costs you had before making a decision to acquire or begin a specific business. These costs are personal and nondeductible. They include any costs
incurred during a general search for, or
preliminary investigation of, a business or
investment possibility.
2. The costs you had in your attempt to acquire or begin a specific business. These
costs are capital expenses and you can
deduct them as a capital loss