@Mike9241
@T2019T
If the taxpayer reports the start up expenses in 2022 along with their first income, I think the IRS is extremely unlikely to question the start up expenses. If the taxpayer claims start up expenses in 2021 with no income, that may warrant a second look, even if business has “begun” under some definition.
If the taxpayer claims the start up expenses in 2021, they would have a net operating loss that would reduce their other taxable income by $2000 and save them some income tax. But, they would not have the expense to deduct in 2022 and would be pay higher business taxes in 2022, including $300 in self-employment tax that they will not get as a deduction if they take the net operating loss in 2021. If we assume the taxpayer is in the 22% marginal tax bracket, that means the choice between taking a $440 reduction of income tax in 2021 or a $740 reduction in income and self-employment tax in 2022.
In other words, even if it would be technically allowable to deduct the start up costs in 2021 as a net operating loss under some definition of “starting the business“, it does not seem to make financial sense unless the taxpayer has some very strong reason to take a smaller deduction now instead of a larger deduction later.
