Tax Year Prior to 2020: Start up LLC with no income but incurred expenses

[phon5]

My husband and his friend started a business last year. They did not do any business, but incurred business start up costs (i.e. permits, licenses, office supplies, etc). Do I enter those amounts in Form 1065 line 14 Taxes and Licenses and line 20 Other deductions or should I just put 0 for everything on Form 1065 and Schedule K-1 and write those expenses off on our personal taxes?

[Anonymous_]

You cannot simply write them off your personal taxes because they are expenses incurred by the LLC.

If the LLC was open for business, then you can deduct those costs as actual expenses on your 1065. 

[Anonymous]

a 1065 should be filed making a 195 election for startup costs so they can be deducted to the extent allowed by law on the 2019 or 2020  return.     you say no business was done but that's not the test. 

this is from an actual court case

IRS pointed out that in 2010  she did not formally advertise the business to the general public and she did not do anything to try to find paying clients. IRS said she did not establish the business was actually functioning in 2010 and her activities were not enough to prove she was “in business”.

The Tax Court upheld the IRS finding she was not in business in 2010 and the business loss she claimed was not allowed.

here's another opinion

Your business officially starts when the business begins operations. For a service or consulting company, that means providing services ( I don't agree - I think advertising - such as mailings, flyers, newspaper ads would be sufficient). For a retail store, that means when the doors open (Again I disagree if there are actions or activities where they're trying to drum up business). You do not have to generate income or sales on the first day of operations, but you must be operating the business so that you can generate income. It is important you determine when the business starts because you treat all costs you incur prior to that time as start-up costs.  Once you begin normal operations, you can deduct normal operating expenses as they occur.

in fact the IRS does not have formal rules as to when a business begins.   

if you "started" the business in2019, then 195 will allow deduction of some or all of the start-up expenses, whereas if the business didn't start until 2020, they would be deductible in that year

it's crucial that the tax return is filed.  failure can result in penalties pf about $400/mo for a maximum of 12 months.

since this is the first year and there seems to be a lack of tax knowledge, I strongly recommend you use a tax pro for the first year.  they can point out various options that are available and will get you off to a proper start.  mess up the first year and every year after that will be a mess.  

[24manchester]

1. Do I need to file a 1065 (2 partners) 

2. Could I have done a fiscal year?

3. If yes to number 1. , Do I need to file by March 2020?

[VictorW9]

1) Yes, you do have to file a 1065 for two partners.

2) Yes, technically you can file your 1065 on a fiscal year basis. But it really doesn't matter if you had done it on a calendar year basis. However, you may have to continue with this going forward.

3) You can still file on a calendar year basis and continue on that basis afterwards until you request a change from IRS. This might be more convenient than filing using a fiscal period. States levy most taxes such as property taxes in full based on the year of inception and is usually on a calendar year basis. So in short, it really doesn't matter whether you start with a calendar or fiscal period.