The tax law allows a generous current deduction for start-up costs if the business begins to function before the close of the year. However, as shown in a new case, Eason, TC Summ. Op. 2024-17, 8/13/24, you can’t deduct start-up expenses if you abandon the business before it ever gets off the ground.

Background: Normally, a business is required to amortize start-up costs over a period of 180 months. However, you can write off up to $5,000 of start-up costs that would otherwise be deductible as “ordinary and necessary” business expenses when the business is ready to accept customers or clients. This includes typical investigatory and marketing research expenses

If the business exceeds the $5,000 limit for start-up costs, the excess must be amortized over 180 months. Furthermore, the $5,000 write-off is phased out on a dollar-for-dollar basis for costs above $50,000. Thus, no current deduction is allowed if start-up costs exceed $55,000.

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The crux of the matter is determining when a business actually begins. It has nothing to do when the business ends.

Facts: A couple owned two residential properties in 2016. For various personal and family reasons, they decided to explore income-generating activities separate and apart from their educational and professional backgrounds. Courses offered by an advanced real estate education service caught their eye. They paid the education company almost $42,000 for the courses in 2016.

Later in the year, the couple formed their own real estate education company as an S corporation. They owned 100% of the stock. Their general intention was to provide advice and guidance to real estate owners and investors, although the specific services that they would provide was unclear.

Nothing in the record suggests that the couple were required to obtain any federal, state, or local licensing before the intended business activity could begin. They had business cards and business stationery printed and they attended some training sessions, but appeared to have done little else to further the business activity. They generated no revenue.

As it turned out, the real estate education company defaulted on many of the services that couple expected to receive from it. The real estate education company went out of business in 2018, and the couple abandoned whatever business activities they intended to conduct through their S corporation.

On their 2016 tax return, the couple deducted business expenses, including the cost of the courses, and claimed a large loss. The IRS issued a notice of deficiency.

Bottom line: The loss was denied and the couple can’t deduct any of the start-up costs. The business never got off the ground, so they aren’t entitled to make this election.