Greg M. Kellett v. Comm., TCM 2022-62
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Social Media Start Up Business Permitted Some Expenses Even with Zero Income (Greg M. Kellett v. Comm., TCM 2022-62)
Greg Kellett timely filed his 2015 tax return deducting 100% of his business costs related to his new social media website. Schedule C expenses totaled $25,922, comprised primarily of $20,509 paid for engineering services and the remainder for telephone, internet, and marketing. The IRS disallowed all of the expenses as startup expenses because the taxpayer reported no business income during 2015 and he did not bill for any of his services. Mr. Kellett explained to the Court that he launched the website, opening it for public use, in September 2015, although he had no income collected in the first year of business operations.
When does a business start? The Court acknowledged that there are no clear regulations available to determine when an active trade our business begins but the US. Court of Appeals for the Fourth Circuit has developed a test which holds that a taxpayer does not begin carrying on a trade or business “until such time as the business has begun to function as a going concern and performed those activities for which it was organized.”
A portion of expenses were deductible. Using the Fourth Circuit’s reasoning, the Court found Kellett’s website began performing those activities for which it was organized when it opened to the public in September 2015. Therefore, the Court permitted a deduction for $8,087 of the 2015 expenses paid after September 30 and advised Kellett to amortize the remaining cost of $16,553 ratably over a 180-month period, as startup expenses.
Also See.
Nicole Harrison v. Comm., TCS 2022-6 Where a full-time employee at Samsung Electronics was also in the early stages of opening her own consulting company. She networked and participated in speaking engagements to build up clientele and her brand. She worked with a firm to set up her website. Expenses prior to beginning operations were start-up expenses.
Anthony Italo Provitola, et al. v. Comm., No. 20-12615 (11th Cir. 2021) Where the first inventory of a device was produced in 2015, legal and professional expenses incurred in prior years were startup expenses. There was no active trade or business because the taxpayer had not “attempted to market or sell a product,” “made any sales,” or “made its website public.”