Start-up and organizational expense deduction on form 1120 and "creating an active trade or business"

[Tushi_Florida]

is a pre-revenue startup (c corp) that is actively looking for investor funds to develop service/product (no active service/product yet) is in "active trade or business" under IRS tax rules?

[MichaelDC]

Yes. "Creating an active trade or business" is pretty much inherent in the definition of start-up costs. Please feel free to post any additional details or questions in the comment section.

"Business start-up and organizational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized.

Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business.       Organizational costs include the costs of creating a corporation. "

Note: You can elect to deduct or amortize certain business start-up costs. Refer to chapters 7 and 8 of Publication 535, Business Expenses. 

[Tushi_Florida]

I need some clarification for what you said. If one makes all preparations to open, lets say, a shop, in 2017 but actually opens in 2018, then deductions only will applicable for 2018. Right? such situations is straight forward.

But what about startups that requires investments for Research&Development of it's service/product? when such startup actually commenced business under IRS regulations?

[MichaelDC]

The IRS has a "sort-of" definitive answer about when a business begins, but it waffles a little too. In this article, it discusses the corporation as a specific business entity:
"Ordinarily, a corporation begins business when it starts the business operations for which it was organized... on the date of its incorporation. Mere organizational activities, such as the obtaining of the corporate charter, are not alone sufficient to show the beginning of business." <a rel="nofollow" target="_blank" href="https://www.irs.gov/irb/2008-34_IRB">https://www.irs.gov/irb/2008-34_IRB</a>
But the IRS also says that "activities of the corporation," for example, buying necessary operating assets, might be a sign that the business has begun.
The concept of going concern comes into play to determine when a business starts. A going concern has an active customer base, is working on advertising, marketing, and other means to gain more customers, and is taking in money from sales. A going concern does not need to be making a profit, but only to show the intent to operate so as to make a profit.
You could say a business starts when it becomes a going concern; that is when it begins operating independently with the purpose of making a profit, with business records being kept, and customers being solicited.
Hope this helps.

[Tushi_Florida]

OK. lets say that startup company (c corp) started business in 2017 but has not generated any revenue/income. What would be a point of start-up and organizational cost deduction on form 1120 where there is no income? But if next year brings in revenue, would not it logical for company carry forward start-up and organizational cost deduction for future income year (rather than deducting it in first no-revenue year and no benefit)? Or maybe I am making mistake here in my analysis. maybe it is in first year ---- income (0) - $ 800.00 (start-up cost) = $ -800.00 and then this amount been carried forward?

[MichaelDC]

A corporation must always file its initial tax return with the Internal Revenue Service, even if it had no business activity to report. Your $800 scenario when it's regarding a C Corporation is pretty much how the loss is handled. Of course, you always have the option to amortize the start-up over 15 years.

[Tushi_Florida]

Thanks for clarification. What are the forms to be attached to form 1120 in a such scenario?