How far back can I deduct start up costs for my LLC?

[Opus 17 · Accepted solution]

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@tagteam wrote:

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@Anonymous wrote:

It is important to note that the start date of a business can change depending on other factors. For example, under certain circumstances, the IRS may analyze a company’s activities to determine whether they are liable for taxes.

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I found that particular passage to be somewhat confounding since even if the business received as little as $1 in income from a client or customer, in exchange for goods or services, it would be difficult to argue that the company is not open for business. 

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The taxpayer here has given several different dates, but I think that if they first got paid in January 2020, it is reasonable to consider the business open in 2020 and file accordingly.  If they were actively seeking clients in December 2019, it could be argued that the business was active in 2019, but I don't think the trouble of amending the 2019 return is worth it.

What I'm more interested in at this point are, what exactly are the taxpayer's "startup costs."  Placing a personally owned drone in service in the business in January 2020 is not a deductible startup cost, rather, it is an asset that must be depreciated based on it's class life and the FMV at the time it was placed in service.  The taxpayer also mentioned training and licensing, which is not a deductible business expense if the training and licensing were needed to meet the minimum qualifications to operate the business.  The taxpayer hasn't really mentioned other startup costs.  

Some expenses that might have been paid for in 2019 that would be deductible as startup costs in 2020 could include buying office supplies, building a web site, getting business cards, advertising, and so on.  But the taxpayer would have to let us know what they are, if any. 

[jakeamarkie]

Thank you guys for the responses and the education on this topic. 

Correct. I was not actively seeking clients in 2019. The flying I did in 2019 with the drone were strictly for personal reasons as, by law, I am not able to operate commercially without the certification I obtained at the end of December in 2019. I did not actively seek clients or get paid for any commercial work until January 2020.

The drone aside, I have used my personal cell phone and my personal computer for business purposes, however I would imagine these would be depreciated the same way as the drone, if at all (based on the present value in January of 2020). 

There have not really been any other major business expenses other than a few dollars for new propellers, SD cards, etc. (less that $200 in 2020).

[tagteam]

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@jakeamarkie wrote:

There have not really been any other major business expenses other than a few dollars for new propellers, SD cards, etc. (less that $200 in 2020).

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Beyond startup costs, you can also deduct organizational expenses related to forming and registering your LLC.

[Opus 17]

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@jakeamarkie wrote:

Thank you guys for the responses and the education on this topic. 

Correct. I was not actively seeking clients in 2019. The flying I did in 2019 with the drone were strictly for personal reasons as, by law, I am not able to operate commercially without the certification I obtained at the end of December in 2019. I did not actively seek clients or get paid for any commercial work until January 2020.

The drone aside, I have used my personal cell phone and my personal computer for business purposes, however I would imagine these would be depreciated the same way as the drone, if at all (based on the present value in January of 2020). 

There have not really been any other major business expenses other than a few dollars for new propellers, SD cards, etc. (less that $200 in 2020).

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To the extent you bought any supplies in 2019, they would technically be "startup costs" but since they are under $5000, they would be deductible as expenses in 2020.  Any supplies or other costs you had in 2020 (including legal costs to organize as an LLC) would simply be deductible as ordinary business expenses on your 2020 schedule C.  good luck. 

[jakeamarkie]

Opus 17, 

I cannot thank you enough for all of your valuable insight. 

Take care and stay healthy!