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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

Start-Up Wrap-Up In my previous columns on start-up costs, I explained how the IRS rules work and when you can deduct expenses for exploring or starting up a new business. Now, aware of what an expensive proposition going out on your own can be, I want to show you some ways to interpret those rules to apply to your situation and to lighten the tax burden of your trek toward independent professionalism. You and Your Tax Preparer As you may have read in a previous column (but it's worth saying again), just about every tax situation offers a variety of approaches -- as my brother used to say, there's more than one way to skin a rabbit. That's where your tax professional comes in -- to advise you on which approach makes the most sense in your particular financial situation. Your job as an IP, or as an IP-in-training, is to keep complete records of your business expenses. With those in hand you'll give your tax pro the raw material that she needs to construct a tax return that is best for you. Start-up costs are a perfect example of the choices involved in deducting business expenses. Are you going to take your deductions in the quickest possible time -- 60 months of amortization? Or should you stretch it out longer? Are you living high off Aunt Ada's trust fund and need some tax deductions this year? Or do you have so little income and so many deductions that you'd like to capitalize the whole thing and take it when you sell the business in three years? Is this new venture your only income and you see no real money coming in for at least two years? The tax decisions vary with each situation. Think Ahead And what if it's November when you leave your high-paying W-2 job to start your new venture and you owe a lot of taxes for that year? Is there some way to get most of the deductions right away, instead of amortizing them over five years? If only, you think, there were some way of turning your start-up costs into regular deductible expenses. Maybe there is. Depending on the business, it may even be easy. Let's write a script for photographer Billy Bridesnapper that illustrates my point. Billy Bridesnapper used to work at Phil's Photos, but then he decided to start his own business. Now he's worried about being short of cash because the $7,200 he spent for his studio and on advertising has wiped him out. Deducting that money at a trickle of $120 per month will not give him the tax deduction he wants. Well, here's a way out for him. Earlier in the year he took photos at his sister's wedding and was paid for his work. He wasn't doing it for Phil's Photos, but by arrangement with his sister and brother-in-law. Okay, then, that was the moment that he became an IP photographer (and the fact that he earned income is evidence that the IRS tends to accept). If he dates the launching of his business from that wedding day -- which occurred before he had the studio repaired -- then the $7,200 for the studio and other projects are not start-up costs but expenses of an existing business. If you can credibly show that your business started some time ago, no matter how small that beginning may be, you can argue that later expenses are an expansion of your already-existing business, and those costs can be taken as deductions in the year that you incur them. Let's sum up start-up costs by means of three scenarios. First scenario: Ben's company has informed him that he's being downsized. He begins to explore the possibility of self-employment in a general way. The company then changes its mind and Ben abandons all plans for self-employment. Any general expenses incurred are not deductible; the IRS considers them personal expenses. Second scenario: It begins the same way. But Ben, after generally exploring self-employment, makes plans to become a Web site creator. He incurs some expenses, including legal fees. But then his employer decides not to fire him. He drops his plans for the Web site business. He cannot deduct the general exploration of self-employment; those are personal expenses. But he can deduct the expenses connected with his pursuit of the Web site operation. They are deducted as a capital loss. Third scenario: Ben is terminated and he sets up the Web site business. He can deduct all of his expenses, both the exploratory look at self-employment and the specific focus on the Web site, including the legal fees. But all of those expenses are start-up costs and thus capital expenses; they cannot be deducted immediately. They have to be amortized over a period of at least five years, or recovered when he disposes of the 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.