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Columns by June Walker: IPs Face Unique Tax Challenges Tax Deductions Are There For The Taking You Say You're Self-Employed -- Will the IRS? Criteria for Self-Employment Do You Have a Business or a Hobby? Proving That You're a Business Keeping Records -- It's Not Just for Taxes Three Ways to Expand Your Business Deductions Can I Deduct Disneyland and Other Questions Mixing Business with Pleasure and Other Gray Areas Quicken for IPs Courses That Qualify Training You Can't Deduct Getting There is Half the Battle Taking Deductions on the Road Getting Credit and Taking Allowances Advertising: Do It, Then Deduct It The Subtle Art of Advertising Deductions Billy Bridesnapper's Start-up Saga Starting Up and Shutting Down Start-Up Wrap-Up Giving Gifts, Taking Deductions

Starting Up and Shutting Down When last we met, photographer Billy Bridesnapper was allowed to deduct all the start-up costs involved in launching his new venture, though he had to deduct them over five years. Now I'll show you what Billy would be allowed to deduct if his undertaking never got beyond the planning stage. What You Can Do if You Never Get Off the Ground If your attempt to go into business is not successful, the expenses you incurred in trying to start up fall into two categories: The costs you had before making a decision to begin or acquire a specific business.They include any costs incurred during a general search for or preliminary exploration of a new venture. These costs are personal and nondeductible. The costs you had in your attempt to acquire or begin a specific business. These costs are capital expenses and you can deduct them as a capital loss. Looking at the IRS guidelines on start-up costs for a business that never gets off the ground, it's quite clear that the agency wants to rein in people who want to explore self-employment, but only as long as they can write off the search at the expense of their fellow taxpayers. In my previous column I explained that the IRS divided start-up costs into two types -- exploratory and specific. If a business never gets started then exploratory expenses never can be deducted; but specific expenses can always be deducted -- one way or another. Be aware that when the IRS says "specific business" it means just that -- that the costs are incurred trying to start a new business or buy an existing one. It does not mean exploring a specific type of business. Therefore, an aspiring IP can be assured of getting a tax deduction if he settles on a business and makes concrete moves toward starting it up, whether the business actually gets started or not. Grace Granddaughter failed to start up one business. Let's see how her expenses get deducted. Grace decided to start baking and selling Grandma's secret-recipe, mouth-watering cookies. She put a nonrefundable deposit on professional bakeware, and gave a month's security on renting a restaurant kitchen during its off hours. But her plans were disrupted when Grandma became ill and Grace had to care for Grandma. Sadly, Grandma died, leaving Grace no inheritance, but with some experience in caring for the elderly. At that point Grace decided that the cookie-making business had crumbled. With her new skills she established herself as a home health aide for old folks. Start-up costs for Grace's cookie-baking business can be deducted on her tax return -- as a capital loss. If You're Thinking About Going Out On Your Own... Don't overdo it. It's tempting to imagine that you can fly to Hawaii, do some scuba diving, fly back to Colorado for some skiing, and then deduct everything by claiming that you were investigating the possibility of starting a scuba diving and/or a ski-instruction business. The IRS is very unyielding about allowing such deductions -- unless, that is, you actually start one of those businesses. I operate on the principle that you might very well be able to take those deductions, but only if you keep excellent records and develop a paper trail that shows a serious and committed interest in going into one or both of those particular businesses. Such records would include letters to companies, to others in the field, to business organizations; subscriptions to trade publications; an itinerary that shows ongoing on-site tours of the areas and businesses; perhaps even the hiring of a consultant to help find the most likely places or existing businesses that you might take over. You get the picture. Otherwise, forget about writing them off. Let's look at what would have happened if Billy Bridesnapper had spent all his time, effort, and money and then decided not to go into business for himself. At the last minute, Billy Bridesnapper got cold feet and decided that the pressures of running his own business would be too much for him. Nevertheless, Billy's expenses for making ready the studio and printing promotional material, which totaled $7,200, are deductible. However, the amount would not be deducted as a start-up cost, but as a capital loss, in much the same way as money lost in a bad stock market purchase is deductible. If Billy purchased a computer, a copying machine, and a print dryer for a business that he never started, he could not deduct the cost of this equipment, until he disposed of the items. For instance, if he sold the computer for $1,000 less than he paid for it, he would have a $1,000 capital loss, which has the same tax effect as having lost $1,000 on a stock market sale. If he sold the print dryer for $100 more than he paid, he'd have a $100 capital gain, and would report it as such on his tax return. If he gave the copier to his cousin, he'd have neither a gain nor a loss on the copier. If he gave the copier to the Community Teen Center, he'd get a charitable contribution deduction on his tax return. But, because Billy never actually went out on his own as an independent professional, he cannot deduct any expenditures for a general exploration into whether he should go into business for himself; the IRS regards those costs as personal expenses. Too bad, because if Billy had become a self-employed photographer, he could have deducted his general exploration expenses, as well as all his other specific start-up costs, too -- although he'd have to amortize his expenses over at least five years. Check out my next column for pointers on the best way to deal with start-up costs from a tax angle, as well as a wrap-up that should help you decide whether you're ready to spend some money on investigating your new IP business. (c) 2000 June Walker. All rights reserved. We'd love to hear your feedback about this column, or put you in touch with June Walker if you like. You may also like to see her biography.