startup costs for failed business over several years

Forum|Forum|5 years ago
February 8, 2021
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From 2017-2019, I worked occasionally on a web app intended one day to become a business. During that time I paid several software developers small sums of money (< $5k total) to help out with the project.

I "opened" the business in 2019, presumably, though that seems like a gray area. The site was live for a while, but I didn't market it so there were very few (< 10) users and no revenue. (There was no method for payment at all built into the site at that time; all accounts were free. I had some ideas for eventually generating revenue but also considered running it as a not-for-profit service.) Hard to say if that constituted "opening" the business or if that was just another phase of development/test. I essentially abandoned the project in 2019; the website stayed up into 2020 but I did not incur any more costs.

I understand that the first $5000 in startup costs can be deducted like ordinary business expenses in the same year as the business is opened. What should I do with these startup costs incurred over multiple years before I "officially" launched in 2019 (if I ever did at all)? (Some of those returns have already been filed; I just want to understand what I should have done here.)

Not A Product Question

JeffreyR77

You are allowed to deduct the ordinary and necessary expenses you incurred in an attempt to make your business successful.

Start-up costs are accumulated until the point where you 'go live' .

In that year you are allowed to deduct up to $5,000 in start-up costs as an expense and amortize the remaining start-up costs over 180 months.

In the year you shut down the business you would recognize the remaining un-amortized startup costs and would be able to reduce any other income you have. This will result in a capital loss.

Small Business Start-Up Expenses

If your business never actually launched, your costs are capital expenses and you can claim them as a capital loss.

How to Treat Cost for Failed Businesses

evil_shenanigansAuthor

Thank you @JeffreyR77 ! To clarify, then, it definitely seems important whether "the attempt to go into business is not successful" (in your link to IRS Publication 535), as that might determine whether I capitalize the expenses or not. I guess I would consider it unsuccessful, but again it seems like a gray area here as I (arguably) did actually launch and run the site for a while -- just with very few users (and no revenue). Do you happen to know of any additional IRS guidance on that point?

JeffreyR77

No, the guidance is pretty concise. If you filed Schedule C for a year or two and claimed some start-up expenses and were amortizing the remainder and then shut down the business, you would write off the remaining balance of the un-amortized expenses as capital losses as well so the end result would be the same.