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ellen724
New Member

Can expenses be deducted as business expenses when you haven't made income yet? Do these offset income from other sources? Can I carry forward? and if so how many years?

Been posting uTube videos for a year but have not made money yet but I have considerable investment in online classes, insurance, photographic equipment. This is not a hobby as I'm trying to make a living at some point in this field but I do have income working part time at a restaurant. 

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Accepted Solutions
Coleen3
Intuit Alumni

Can expenses be deducted as business expenses when you haven't made income yet? Do these offset income from other sources? Can I carry forward? and if so how many years?

Here’s what you need to know about deducting start-up costs, along with a real-life example of how the Tax Court applied the rules. 

Internal Revenue Code Section 162 allows current deductions for “ordinary and necessary” business expenses. Section 162 expenses are basically routine expenses incurred in operating an up-and-running business. Examples include employee wages, rent, utilities and advertising. Section 162 expenses can generally be deducted in the year when they’re paid or incurred. 

Many taxpayers are unaware that Section 162-type expenses incurred by a start-up can’t necessarily be deducted right away. That’s because these expenses are classified as Section 195 start-up expenses until the “active conduct” of business begins. 

Once a taxpayer meets the active-conduct standard, Section 162-type expenses become Section 162 expenses, and the taxpayer can deduct them currently. (This assumes that other provisions — such as the passive activity loss or at-risk basis rules — don’t come into play and prevent current deductibility.)

Deduct or Amortize Section 195 Expenses When Business Commences

Section 195 start-up expenses are Section 162-type expenses that are incurred before the business actively commences operations. Start-up expenses can include costs incurred: 

  • To investigate the creation or acquisition of a business, 
  • To create a new business, or 
  • To engage in any for-profit activity before the active conduct of business begins, in anticipation of such an activity becoming an active business. 

Common examples of Section 195 start-up expenses include employee training, rent, utilities and marketing expenses incurred prior to opening a business. 

In the tax year when active conduct of business commences, the Section 195 rules allow taxpayers to elect to amortize start-up expenses. The election potentially allows an immediate deduction for up to $5,000 of start-up expenses. However, the $5,000 deduction allowance is reduced dollar-for-dollar by the amount of cumulative start-up expenses in excess of $50,000. Any start-up expenses that can’t be deducted in the tax year the election is made are amortized over 180 months on a straight-line basis. Amortization starts in the month in which the active conduct of business begins. 

A taxpayer is deemed to have made this election in the tax year when active conduct of business commences unless, on a timely filed tax return for the year, the taxpayer elects instead to capitalize start-up expenses.

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1 Reply
Coleen3
Intuit Alumni

Can expenses be deducted as business expenses when you haven't made income yet? Do these offset income from other sources? Can I carry forward? and if so how many years?

Here’s what you need to know about deducting start-up costs, along with a real-life example of how the Tax Court applied the rules. 

Internal Revenue Code Section 162 allows current deductions for “ordinary and necessary” business expenses. Section 162 expenses are basically routine expenses incurred in operating an up-and-running business. Examples include employee wages, rent, utilities and advertising. Section 162 expenses can generally be deducted in the year when they’re paid or incurred. 

Many taxpayers are unaware that Section 162-type expenses incurred by a start-up can’t necessarily be deducted right away. That’s because these expenses are classified as Section 195 start-up expenses until the “active conduct” of business begins. 

Once a taxpayer meets the active-conduct standard, Section 162-type expenses become Section 162 expenses, and the taxpayer can deduct them currently. (This assumes that other provisions — such as the passive activity loss or at-risk basis rules — don’t come into play and prevent current deductibility.)

Deduct or Amortize Section 195 Expenses When Business Commences

Section 195 start-up expenses are Section 162-type expenses that are incurred before the business actively commences operations. Start-up expenses can include costs incurred: 

  • To investigate the creation or acquisition of a business, 
  • To create a new business, or 
  • To engage in any for-profit activity before the active conduct of business begins, in anticipation of such an activity becoming an active business. 

Common examples of Section 195 start-up expenses include employee training, rent, utilities and marketing expenses incurred prior to opening a business. 

In the tax year when active conduct of business commences, the Section 195 rules allow taxpayers to elect to amortize start-up expenses. The election potentially allows an immediate deduction for up to $5,000 of start-up expenses. However, the $5,000 deduction allowance is reduced dollar-for-dollar by the amount of cumulative start-up expenses in excess of $50,000. Any start-up expenses that can’t be deducted in the tax year the election is made are amortized over 180 months on a straight-line basis. Amortization starts in the month in which the active conduct of business begins. 

A taxpayer is deemed to have made this election in the tax year when active conduct of business commences unless, on a timely filed tax return for the year, the taxpayer elects instead to capitalize start-up expenses.

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