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When is a Business Expense Not a Business Expense?

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Expenses incurred before a business has started are NOT deductible:

It has been quite clear in tax law that you can’t deduct business expenses or take a loss if you haven’t started up your business. So what qualifies as a start up? The key is that you are ready to take on clients or customers. Here is a recent case that illustrates this:

An engineer bought a boat with the intention of modifying it to support a landing pad for helicopters. and then renting out the boat. He even contracted with a firm to do the work. HOWEVER, the necessary modifications were never completed. The boat was later damaged and unusable, but he still tried to write off the damage as a business expense and write of the dockage fees.

In holding that he hadn’t started a business, the Tax Court noted that he had no business plan and never got past the preparatory stage. He also never attempted to rent the boat out to anyone and had no service contracts or gross receipts.

This concept has a lot of implications. For example, let’s say that you want to rent out your home after doing some modifications to the property. You can only start depreciating your property and deducting other business related expenses when you start advertising for a tenant. Being able to accept customers is crucial. Having a business plan is also important.

Note: you don’t need to have any revenue yet,but you should show that you tried to get revenue.


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