When start-up expenses don’t count

You know the perfect new business. It’s right up your alley. You spend nearly a thousand dollars on a fancy lawyer who registers your name, gets you a federal ID, and establishes you in Delaware (for tax purposes, of course!) as well as your home state. You even spring for a p.o. box and slick business cards. Maybe even buy a slim new top-of-the-line laptop.

But then life gets in the way. You meant to run ads. You wanted to hire a salesman. You were going to order inventory. Heck, you were going to make Real Money so you could quit the day job. But after three or four years…nothing.

Consider this. Let’s say I dig a foundation intending to build a house, but I never do anything beyond arranging for the delivery of several dozen pallets of block. Or I buy a dress pattern and cloth intending to make a dress, but after I lay it out on the table, I never even cut the cloth. Or I take books out of the library but don’t open them. Or I register for classes but never show up.

It’s the same with your new business. Did you really start it? Did you begin doing the sort of behaviors common with that sort of business? Are you regularly keeping up with the business’s needs? Are you even taking in revenue? Do you have a profit motive – or a pipe dream? Your actions related to the ongoing business are very important.

Three years searching for the perfect retail site is not running the business. Four years building your amazing labor-saving device is not running a business. Two years entertaining possible investors or attending seminars and conferences or reading trade magazines…not running a business. Instead, if anything, these are just more start-up expenses that you might someday be able to claim – once you finally start performing the functions for which your business was intended.

If you’d done the activities in the first paragraph in December, but actually opened your office and made your first sale in January of the following year, you can certainly take the start-up expenses! You can’t take them in the year you spent the money, but you can take them the following year, when you became active. Even if it takes you 3 years to get active, and even if you incur fees for annual reports and tax prep for each of those 3 early non-active years, you can’t take any expenses until you actually start the business.

The expenses of starting up a business are certainly deductible…providing you actually start that new business! Until then, it’s really more of a hobby. And there are no tax breaks for a hobby.