January 2, 2022 10:18 pm

No Schedule C Deductions Before Business Commences

A self-employed individual may deduct various business expenses. However, as a recent Tax Court decision points out, you must actually function as a going concern (an active trade or business) to take deductions on Schedule C (Vardan Antonyan, TC Memo 2021-138). In this case, the taxpayer had a business plan to develop realty into parcels to be rented out for organic farming. He had to take various steps to get the land ready (e.g., put up a non-livable building such as a barn on each parcel, and install an irrigation system), but had not yet completed any of those steps.

If you are still in the start-up phase, no deductions are allowed. Once business operations begin, then you may be eligible for a deduction for start-up expenses. This means an immediate deduction in the first year of operations up to $5,000, reduced dollar for dollar by expenses over $50,000, with any excess deducted ratably over 180 months.

Tax Glossary

Accrual method of accounting

A business method of accounting requiring income to be reported when earned and expenses to be deducted when incurred. However, deductions generally may not be claimed until economic performance has occurred.

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