In my free time, I attempted to start a web business, but never got past the startup phase so it never generated any revenue. Expenses for Startup That Never Launched describes a similar case, but my situation is a little more complicated as it spans multiple years.
My expenses included hosting expenses for the site, registration fees for an LLC, payments to software engineers for writing code, payments to social media marketers, and possibly others. (I also purchased a domain name for $3000, but I entered that as a 15-year amortized asset, not an expense.)
In year 1, I spent, say, $1000 on these expenses, and reported them as expenses on a Schedule C (with no income).
Ditto for year 2.
In year 3, I spent, say, another $2000, and then eventually gave up and quit working on the business.
At some point in year 2 or 3 I "launched" the business, meaning the site went live. Don't recall exactly when. Even after that point I was in active development, so launching didn't really change the nature of the expenses. [EDIT: Also note that when I went live all accounts on the site were free, so there was no potential revenue stream at that time, if that matters.]
Now it's time to pay taxes on year 3. Questions:
* Are all my expenses considered startup costs? (Does the type of expense matter, or whether or not it occurred before or after the site went live?)
* Is it true that all of my Year 3 expenses should be considered a capital loss?
* Since my prior-year Schedule C expenses (already filed) are taxed a different rate, do I need to recapture that difference somehow on the Year 3 return?
Doesn't matter you didn't profit or make any money. What matters is when you opened for business. That looks like when the site went live so all expenses before the site went live besides asset purchases are start up costs.
there can be another issue the IRS could raise. Does your activity rise to the level of a business or was it a hobby. if it's a hobby then expenses are limited to revenue.
see this link for the criteria the IRS uses.
if it does not meet the criteria of a hobby, then as stated before going live they're start-up costs. any amount that exceeded the limit for deduction and thus had to be capitalized, then the unamortized balance can be written off in the year the operations ceased