Start up Expense No Income

[Adri]

Client took a course to learn to buy and sell (flip) houses. I know the course itself is not deductible.             

My question is if the Mentorship program which allows him to contact/consult with experts, and which he pays monthly can be deducted and under what category.  

The other expense in question is the renewal of the coaching program, which is renewal of the original course but which was paid for after client was officially in business, if so, under what category? 

Thank you. 

Client had 0 income in 2022. 

[Just-Lisa-Now-]

With a Flipping business, how do you know when youre actually "in business"? 

Has he purchased his first flip yet?

[Adri]

He has not purchased a house yet. Would IRS consider him to be in business after he sells his first house, or when he makes his first offer even if he doesn't get the property or when he is actively looking for properties?  

[Just-Lisa-Now-]

Im honestly not sure, I haven't researched it, that's why I worded it as a question...has he made any offers to purchase anything, how is he "in business"? 

[Andrew Warner]

The key question is when has the business activity started.  There can be expenses which are considered as "start-up" costs and these maybe either expenses or amortized depending on the nature of the expenses.

Normally, the start date for a business is when the business is registered. This means that a company like an LLC or a partnership is responsible for paying taxes on the date they register with a particular state. It also may be possible for a business to choose their start date.

Business start-up usually can be claimed in the year the business was started.  One also can amortize these costs over a certain number of years.

It is unclear why you state that the initial cost of the Seminar is not a business start-up cost.

Also, expenses of this type could be deducted as "Other Expenses".

[BobKamman · Accepted solution]

The date of registration has nothing to do with the start of business operations, for purposes of allowing current  tax deductions rather than those that must be amortized.  But if you're going to copy and paste from someone's website, at least give them credit. 

https://cookcpagroup.com/what-defines-the-start-of-a-business-for-tax-purposes/

Business startup and organizational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business startup and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total startup or organizational costs exceed $50,000. Any remaining costs must be amortized.

If your attempt to go into business is unsuccessful. If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories.

--The costs you had before making a decision to acquire or begin a specific business. These costs are personal and nondeductible. They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility.
--The costs you had in your attempt to acquire or begin a specific business. These costs are capital expenses and you can deduct them as a capital loss.

https://www.irs.gov/publications/p535 

In any case, I feel sorry for these people who go to seminars but don't learn that the best way to make money is by selling seminars.  Did someone tell your client that by calling it a business, the profit on that flipped house is going to be taxed twice, for income tax and then for self-employment tax?  And in a declining real estate market, that huge Schedule C loss combined with a 1099-S may inspire IRS to apply a $3,000 annual limit.  

[Adri]

Thank you very much for your explanation. This has a lot of ramifications and I will be sure to advise him on that and,... I agree with your points. 

If he was your client, for year 2022, would you deduct any of the mentorship expense which allows him to contact/consult with experts and which he pays monthly?   Would you deduct any of the renewal of the coaching program?  or would you classify those two as non deductible just like the original course he took.

Thank you in advance for your answer, 

[Andrew Warner]

Thanks for the question ... 

One way to weigh the tax implications is to consider whether this activity is truly a "business" vs. a "hobby".

The guidance from the IRS in this regarding is as follows:

https://www.irs.gov/newsroom/heres-how-to-tell-the-difference-between-a-hobby-and-a-business-for-tax...

A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. People operate a business with the intention of making a profit. Many people engage in hobby activities that turn into a source of income. However, determining if that hobby has grown into a business can be confusing.

To help simplify things, the IRS has established factors taxpayers must consider when determining whether their activity is a business or hobby.

These factors are whether:

• The taxpayer carries out activity in a businesslike manner and maintains complete and accurate books and records.
•  The taxpayer puts time and effort into the activity to show they intend to make it profitable.
• The taxpayer depends on income from the activity for their livelihood.
• The taxpayer has personal motives for carrying out the activity such as general enjoyment or relaxation.
• The taxpayer has enough income from other sources to fund the activity
• Losses are due to circumstances beyond the taxpayer's control or are normal for the startup phase of their type of business.
• There is a change to methods of operation to improve profitability.
• Taxpayer and their advisor have the knowledge needed to carry out the activity as a successful business.
• The taxpayer was successful in making a profit in similar activities in the past.
• Activity makes a profit in some years and how much profit it makes.
• The taxpayer can expect to make a future profit from the appreciation of the assets used in the activity.

All factors, facts, and circumstances with respect to the activity must be considered. No one factor is more important than another.

If there is a genuine sense that this is really taking the shape of a business, I would deduct the cost of the mentorship expense and I also deduct the cost for the renewal of the coaching program.

Others may have a different view, but this how I see this based on what you have described.  It really hinges on intent, purpose and effort in trying to get a new business up and running, and ultimately profitable (and some of this is a judgement call).

[BobKamman]

I would refer him to someone else in his alternate universe.  Maybe someone suggested to him by his mentor/coach.  

[Frustrated-in-IL]

I think you need to ask your client one question.  When your client sells his first flip, is he going to pay FICA tax and income tax at ordinary rates?  Or is he going to assert the sale is a capital gain?  If it is the latter, how can he justify a business?

[taxes96786]

I wouldn't deduct any expenses until the business has income.