Taxing Lessons Case Summaries

Case — Business Start-Up Expenses

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TL Case Summ


When does a business start for purposes of deducting expenses?


Taxpayer Says: The real estate and rental business started on the date the first property contract was entered into. Though the contract was later cancelled, costs incurred from that date are deductible as ordinary and necessary expenses.

Internal Revenue Service Says: The business did not begin operating until the activities for which the business was organized began. That happened when the first investment property purchased was held out for rent. Costs prior to then are start-up expenses and are not deductible as ordinary and necessary business expenses.


From Internal Revenue Code Section 162(a): Generally allows a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

From Hardy v. Commissioner, 93 T.C. 684, 686 (1989):  For a taxpayer to deduct expenses under section 162(a), the expenses must relate to a trade or business functioning at the time the expenses are incurred.

From Glotov v. Commissioner, T.C. Memo. 2007-147: A taxpayer is not carrying on a trade or business under section 162(a) until the business is functioning as a going concern and performing the activities for which it was organized.


Expenses you incur before your business actually begins, such as advertising or employee training, are considered start-up costs and are generally non-deductible capital expenditures. (Note that under current law you can elect to deduct part of these expenses when you begin operating your business.)

In this case, the dispute arose over the date the business (a real estate investment and rental venture) became active.

During 2004 the taxpayer created a business name, completed a business outline, took courses, received a loan and opened a credit card and checking account. In addition, the taxpayer made unsuccessful offers on various properties and entered into a contract to purchase property that he later cancelled. The taxpayer believes the business started on the date this contract was entered into, which was May 1, 2004. He concedes costs prior to that date are start-up expenses, but believes those paid after are deductible as ordinary and necessary business expenses.

The IRS says that according to the taxpayer’s business outline, the purpose of the business was to buy, remodel and rent property. Since the first property purchase occurred on December 30, 2004 and the property purchased on that date was not held out for rent until the following year, the business was not active until after 2004. All of the costs expended during 2004 are start-up expenses.


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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit and

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Sorry, wrong answer :(
Right answer!
For the IRS. Activities in 2004 were, at most, start-up activities, because the taxpayer had not yet commenced the activities for which the business was organized, i.e., buying, selling, renting, or offering to rent property.