John R. Bullis: When does business activity begin?
September 15, 2018
Tax Code Section 195 covers when a business begins and when the expenses are deductible.
Mr. H. Samadi claimed business driving expenses in 2013 and 2014 in his "real estate sales" business.
He didn't make any commissions as a licensed real estate salesman in years 2013 and 2014. He did drive from his brother's home in Marina to Sacramento to look at possible houses to consider buying.
He and his brother and three others sort of formed a "group" to consider flipping houses (buying and quickly selling). They didn't buy any houses in the two years under question.
IRS audited his returns for 2013 and 2014 and disallowed his business driving expenses because the business "had not yet begun."
The Tax Court in a summary opinion said, "Activities relating to only 'exploratory or formative stages' do not rise to the level of a trade or business. Code Section 162(a) does not permit current deductions for startup or preopening expenses incurred … before beginning business operations."
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There was no evidence in the court record to suggest he was buying and selling real estate on a regular and continuous basis. He testified he earned no commissions in the two years.
If preopening expenses are incurred, those expenses will be postponed until the business actually begins. There are special tax rules about "start up" or preopening business expenses. But if the business never begins then the expenses end up not being deductible at all, anytime.
A written business plan is a big help in considering if a particular business activity should be done. The business plan helps realistically look at the possibilities of success and the costs in time and money to achieve the business success. It appears Mr. Samadi and his group only thought it would be wonderful to buy houses at a cheap price and turn around and sell them at a profit (after all expenses are considered).
Mr. Samadi's driving of more than 50,000 miles total for the two years was found to not be a deduction since the business hadn't begun. This issue was so easy to understand it's hard to see why he even bothered to go to Tax Court.
Did you hear? "To be successful you must accept all challenges that come your way. You can't just accept the ones you like," by Mike Kafka.