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Expenses for an unsuccessful business

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starlord

Member
In my free time, I attempted to start a web business, but never got past the startup phase so it never generated any revenue. My expenses included hosting expenses for the site, registration fees for an LLC, payments to software contractors for writing code, payments to social media marketers, and possibly others. (I also purchased a domain name for $3000, but I entered that as a 15-year amortized asset, not an expense.)

In year 1, I spent, say, $1000 on these expenses, and reported them as expenses on a Schedule C (with no income). Ditto for year 2. In year 3, I spent, say, another $2000, and then eventually gave up and quit working on the business.

At some point in year 2 or 3 I "launched" the business, meaning the site went live. Don't recall exactly when. Even after that point I was in active development, so launching didn't really change the nature of the expenses. When I launched the site all accounts were free, so there was no revenue model at that time.

Now it's time to pay taxes on year 3. Questions:
  • Are all my expenses considered startup costs? (Does the type of expense matter, or whether or not it occurred before or after the site went live?)
  • Is it true that all of my Year 3 expenses should be considered a capital loss, not a business loss?
  • Since my Year 1 and Year 2 returns (already filed) listed those losses as expenses (Schedule C business losses), not capital losses, do I need to recapture that difference somehow on the Year 3 return?
 


LdiJ

Senior Member
In my free time, I attempted to start a web business, but never got past the startup phase so it never generated any revenue. My expenses included hosting expenses for the site, registration fees for an LLC, payments to software contractors for writing code, payments to social media marketers, and possibly others. (I also purchased a domain name for $3000, but I entered that as a 15-year amortized asset, not an expense.)

In year 1, I spent, say, $1000 on these expenses, and reported them as expenses on a Schedule C (with no income). Ditto for year 2. In year 3, I spent, say, another $2000, and then eventually gave up and quit working on the business.

At some point in year 2 or 3 I "launched" the business, meaning the site went live. Don't recall exactly when. Even after that point I was in active development, so launching didn't really change the nature of the expenses. When I launched the site all accounts were free, so there was no revenue model at that time.

Now it's time to pay taxes on year 3. Questions:
  • Are all my expenses considered startup costs? (Does the type of expense matter, or whether or not it occurred before or after the site went live?)
  • Is it true that all of my Year 3 expenses should be considered a capital loss, not a business loss?
  • Since my Year 1 and Year 2 returns (already filed) listed those losses as expenses (Schedule C business losses), not capital losses, do I need to recapture that difference somehow on the Year 3 return?
In your first paragraph you said you never got past the start up phase and therefore never earned any income. Later you said "Now its time to pay taxes on year 3", which implies that you actually had a profit for year 3. Did you make money on year 3 or are you talking about taxes in general when you say "Now its time to pay taxes on year 3"?

Start up costs are normally amortized starting in the year first year that you are actively trying to earn money. Therefore I wouldn't have taken any expenses until the year you went live.
 

starlord

Member
In your first paragraph you said you never got past the start up phase and therefore never earned any income. Later you said "Now its time to pay taxes on year 3", which implies that you actually had a profit for year 3. Did you make money on year 3 or are you talking about taxes in general when you say "Now its time to pay taxes on year 3"?

Start up costs are normally amortized starting in the year first year that you are actively trying to earn money. Therefore I wouldn't have taken any expenses until the year you went live.
Sorry, I should have said "now it's time to *file* taxes on year 3". There's no income from the business, just another loss. (Some income from other sources on the total tax return.) Thanks for the clarification.
 

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