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Tax Court Holds Business Start Up Expenses Are Deductible

The Tax Court has held that business startup expenses were deductible under the Internal Revenue Code, even though such expenses were incurred before the operation became an active trade or business.  In this case, the taxpayer began operating a horse boarding and training facility before the business was incorporated.  As income increased, she established a limited liability company to operate the facility.  However, this occurred six years later.  The IRS argued that the taxpayer’s initial expenses were startup expenses that should be capitalized, not deducted immediately.  However, the Court found that even though the expenses paid were incurred in the pre-operating phase of the horse farm becoming an active trade or business, the expenses were still deductible under the Internal Revenue Code.

Points of Interest

  • The beginning of the year is the best time to develop a strategy for your business.
  • Given that the economy is currently in a recession, businesses should trim unnecessary expenses and work hard to increase revenue. Most expenses that business people trim tend to involve payroll and inventory.
  • Proper planning and implementation of an exit, succession and tax strategy allows you to keep more of your hard earned cash and allows you to have a better retirement when the time comes.

By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors