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Updated for 2011
Small Business Deductions: Startup Costs
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Costs of Not Going Into Business
Whether or not you get to deduct costs associated with your attempt to go into business depends on the type of costs you incur.
Investigatory costs to conduct a general search to start or purchase a business before a decision is made to start a particular business are not deductible if your plans to go into business are abandoned; they are personal expenses.
Costs incurred after a decision has been made in an attempt to start or purchase a particular business, but the deal falls through, are capital expenses and are deductible as a capital loss in the year the attempt to go into business fails.
Situation 1:
No decision made to go into business.
Example:
- You're thinking about opening a pizza place.
- You don't have any particular restaurant in mind.
- You spend four week-ends driving around town talking to owners of pizza restaurants to get an idea of what's involved.
- You also look into some pizza restaurants that are up for sale.
- You visit restaurant equipment supply stores to get pricing information
- You have an accountant prepare some stats on the pizza restaurant industry
- Your costs total $1,250 for traveling, professional services, and research material.
- You decide it's not the right time to start a business and abandon your plans.
Your costs are not deductible. This is a general search. The costs are investigatory and are considered personal expenses.
Situation 2:
You decide on a specific business, then cancel your plans?
Example:
- You plan on owning a pizza restaurant.
- You travel around the city to see 10 pizza restaurants that are available for sale.
- Three of them look promising.
- You pay $2,200 to have them audited.
- Your traveling costs were $300.
- You decide on a specific restaurant, Pizza Pizzazz.
- You pay your attorney $500 to draw up the necessary documents.
- Then, you have second thoughts, and cancel the deal.
The $500 attorney fee is deductible as a capital loss. Costs you incur after making a decision to acquire or to establish a particular business, but before operations begin, are capital expenses. You may deduct the $500 fee in the year your attempt to go into business fails.
However, the $2,500 investigatory expense is a nondeductible personal expense. It was spent to conduct a general search before making the decision to operate a particular business.
Next:
Start-up Costs and Organizational Costs: How to Make the Election to Deduct Start-up Costs or Organizational Costs
Related Links
- What Are start-up Costs?
- Qualifying start-up Costs
- Two Categories of start-up Costs
- Purchasing an Active Trade or Business
- What are organizational Costs?
- Start-up Costs versus Organizational Costs
- Qualifying Organizational Costs
- Nonqualifying Organizational Costs
- How to Make the Election to Deduct start-up and Organizational Costs
- Deducting start-up and Organizational Costs
- How to Claim start-up and Organizational Costs
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