In Uncategorized on 04/16/2020 at 17:50

Unlike the magnificent start to creation, Henry C. Williams and Sonja L. Johnson, 202 T. C. Memo. 48, filed 4/16/20, find that the expenses of beginning one’s own business can only be amortized over 15 (count ‘em, 15) years, and then commencing in the year when the business becomes a going concern. Those expenses are not deductible in year when paid or incurred.

Judge Vasquez: “To qualify for deduction under section 162 or 212, expenses must be associated with a trade or business or other income-producing activity that is functioning as a going concern. Although a taxpayer may be committed to entering into a business and invest considerable time and money in preparing to do so, the activity does not constitute a trade or business for section 162(a) purposes until the business is actually functioning and performing the activities for which it was organized. Business operations with respect to the activity must have actually commenced.” 2020 T. C. Memo. 48, at p.18. (Citations omitted). So nothing doing until something is doing.

And when something is doing, here’s how to deal with those expenses.

“However, under section 195(b)(1)(A), a taxpayer may elect to deduct for the taxable year in which the active trade or business begins up to $5,000 of startup expenditures, reduced by the amount by which those expenditures exceed $50,000. The remainder is allowable as a deduction ratably over the 180-month period beginning with the month in which the active trade or business begins. Sec. 195(b)(1)(B). This election must be made no later than the time prescribed for filing the return for the taxable year in which the trade or business begins. Sec. 195(d)(1). Section 1.195-1(b), Income Tax Regs., provides that a ‘taxpayer is deemed to have made an election under section 195(b) to amortize start-up expenditures as defined in section 195(c)(1) for the taxable year in which the active trade or business to which the expenditures relate begins.’ A taxpayer may forgo this deemed election by affirmatively electing to capitalize startup expenditures on a timely filed return for that year. Sec. 1.195-1(b), Income Tax Regs.” 2020 T. C. Memo. 48, at p. 19. (Footnote omitted; it deals with years for which the election can be taken).

Henry’s testimony that he really looked hard for business to buy is entirely believable, but that just means he was really starting a business.

When one acquires a new business, as Henry ultimately did, one pays for goodwill among other things. Henry claims the insurance business he bought was all goodwill, as the other assets were almost worthless. Section 197 gives a 15-year writeoff similar to start-up costs, and again Henry’s credible testimony carries the day. I myself have found that sales of service companies generally involve assets that walk out the door every evening, namely “an established staff with extensive knowledge of the customer base, the accounts, and other aspects of the business.” 2020 T. C. Memo. 48, at p. 30. Of course, a one-man band like Harold Schmeets is another story, for which see my blogpost “His Name Is His Fame,” 10/15/12.

There’s the usual Section 274 insubstantiation for a lot of Henry’s expenses, a Section 72 10% whatever, and IRS does some major folderoos. But nothing that need long detain the tourist.



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