Technical issue: How to deduct startup costs and home office when date business opened is different than date work started

[pher]

My spouse started working on their new startup (self-employment) in March 2022. The business is an online business and didn't actually "open its door" until October 2022.

In the "Expenses" section for this business, it should be possible to list costs my spouse incurred between March - October as "startup costs." When putting in the business details, we put March 2022 as the date the work started. But, when trying to put these startup costs in, TurboTax Online rejects this and says these occurred after the business started. I think it's assuming the date work started is the same as the date the business opened — but these are not the same in this case. March is the date the work started. October is the date the business opened.

If I simply change the date the work started to October, that allows me to insert the startup costs — but, then TurboTax doesn't allow us to claim the home deduction going back to March, when the work actually started. So basically because TurboTax is treating work-start as equal to business-open, it seems like we either have to not deduct the startup costs, or not deduct the home office.

What is the right way to insert the dates into TurboTax to be able to get both the startup costs and home office deducted — both which my spouse qualifies for?

[AnnetteB6]

There is no method to tell TurboTax to handle this situation with two different dates.  

Based on the situation, the expenses incurred, and the work that was done before the business 'opened its door', you will need to decide if the costs incurred between March and October were truly start-up costs for the business or if the business actually started in March.  

If you consider October to be the date that the business started, then up to that point, there was not a qualified home office since the business did not exist until October.  Home office expenses cannot be considered start-up costs.

[pher]

Thanks Annette — This helps to know that home office expenses cannot be considered start-up costs. I didn't see this myself anywhere on the IRS website, so your clarification helps.  With that said, as a result now I am a bit confused about how TurboTax Online is treating startup costs.

While the business didn't actually incorporate and do business until October, my spouse's work to investigate and set up the business started in March. So in TurboTax's "When the work started" field for this line of work, seemingly the accurate date to enter would be March based on the way TurboTax has asked the question "Tell us about how long [spouse name] has worked in [line of work]" ---> "Enter the start date"? I assume that date TurboTax is asking for is supposed to be about when the *work* actually started (Mar), and not when the *business* started operating (Oct)?

Assuming March is correct (if not, please correct me about what TurboTax is actually asking for, and then you can ignore the rest of this message): By selecting March, TurboTax won't accept any "startup expenses" that occurred after that March date. 

However, when I look at the IRS's definition of startup costs at https://www.irs.gov/newsroom/heres-how-businesses-can-deduct-startup-costs-from-their-federal-taxes, it says they are:

- Defined as "amounts the business paid or incurred for creating an active trade or business, or investigating the creation or acquisition of an active trade or business."

- Recoverable if "It's a cost a business pays or incurs before the day their active trade or business begins."

So, by this definition, the costs incurred "before the[...] business begins" should be all the way from March through October. Seems pretty straightforward. But TurboTax will only accept through March, based on the fact that I've told it that's when when the line of work started.

So am I misinterpreting what TurboTax is asking for when it asks when this line of work started?

[ThomasM125]

Yes, you are misinterpreting when the work started. The line of work started when your products or services were available to your potential customers or clients. Costs incurred before that date would be considered start up costs.  

[pher]

Perfect -- thanks for clarifying!

I would recommend that TurboTax update how it asks for line-of-work information, then, as it's currently confusing. When asking the question "Tell us about how long [person] has worked in [industry]", it asks for the start date of that line of work in that industry -- not the start date of the business. Naturally, the line of work (in that industry) to create a business starts before the business launches — so I think it really should instead be asking when the business started, not when the line of work / industry started. Hopefully you can pass along this feedback 🙂

Thanks again!