Tax Court Halts Deduction for Start-Up Costs


If your client just set up their startup business, they might not want to try to write off the costs and forget about it. As Ken Berry points out, a new Tax Court case makes the IRS's opinion of this move very clear.

Jun 28th 2022
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The tax law provides a faster-than-usual write-off for costs associated with starting a business venture, but it’s not a gimme. As shown in a new case, Harrison, TC Sum. Op. 2022-6. 5/12/22, you must be able to demonstrate that you’re completely open for business, whether or not you earned any revenue from the operation.  

Generally speaking, 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 qualified start-up costs that would otherwise be deductible as “ordinary and necessary” business expenses when the business is ready to accept customers or clients. 

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

The IRS often challenges the fast write-off for start-up costs for a business venture that is just getting off the ground or is in an exploratory stage. 

Facts of the new case: The taxpayer, a resident of New York and a full-time employee at Samsung Electronics, expressed interest in launching a corporate strategy consulting business in 2015. To help build her brand, she contracted with a company that set up a website through which she published assessments about technology trends and developments. She also paid the company to host the website on a server.

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Replies (2)

Comments for this post are now closed.

By SimonP
Jun 29th 2022 15:26 EDT

That's ridiculous.

I was in full-time employment when I "dipped my toes in the water" and started doing accounts and tax returns for a few clients, in my spare time. After 2 years of gaining the experience and confidence to go for it full time, I left my secure employment and became one of the self-employed.

That was in 1976: 46 years later I still have my own accounting practice and some of my clients have been with me for over 40 years.

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By Michael Plaks
Jul 3rd 2022 05:38 EDT

Misleading title. The case was not about start-up expenses, much less about halting them. The court disallowed the TP's entire Schedule C, deciding that her activities did not rise to the level of trade or business. The court provided no support for its superficial conclusion and, quite disturbingly, singled out the TP maintaining her full-time W2 job as justification. Bad decision all around, contradicting the extensive case history on Sec. 195.

However, the TP did not help her case by filing a Sch C with over $70k of expenses against $400 of income, using rounded numbers for expenses and, very importantly, ruining her credibility by failing to substantiate pretty much everything else she claimed on her return: charitable donations, rental losses and so on.

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