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START ME UP

April 26, 2007

One of the snakes lurking in the tax law is the "start-up costs" rule of Section 195. If you incur expenses to start a new business, you have to capitalize them until the business actually starts. It's not always clear when this happens.

Once the business starts, you can make an election under Section 195 to expense up to $5,000 of start up costs; anything over that gets amortized over 15 years.

A would-be author learned about start up costs the hard way in Tax Court yesterday. Robert Deward is a military history buff who has spent years doing research for a book he plans to write about World War I. It's not a cheap process, and Mr. Deward looked to his tax return for help:

Respondent disallowed all of the $15,892 of "other expenses" claimed on Mr. Deward's Schedule C. Those expenses consisted of $1,765 of amortization and $14,127 for research and development. The research and development deduction on Mr. Deward's 2001 Schedule C consisted of expenses petitioners incurred while on a trip to Europe in 2001 and of research expenses, all related to the proposed WWI book.

The IRS apparently didn't dispute whether the expenses were legitimate; they just said it didn't matter. The Tax Court agreed:

Whether or not he had a profit motive, Mr. Deward has failed to establish that he did anything more in 2001 than research for the book that he intends to write about WWI. The expenses related to researching a topic in order to write a book, without more, are "start-up expenditures" within the meaning of section 195. Accordingly, we will sustain respondent's determination to disallow the miscellaneous deductions of $15,892 on Mr. Deward's Schedule C relating to amortization and the expenditures incurred for research for his book, including costs for traveling to Europe.

The Moral? When you are starting a new business, sooner you "start," the sooner you get to take deductions.

Cite: Robert J. Deward et ux. v. Commissioner; T.C. Summ. Op. 2007-62

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