startup-costsI’m researching the construction of some particular computer hardware, but I expect it to be several years (let’s say 5) before I may, if at all, complete it. I’d like to be able to write off my research related costs, but I feel like this is something I could only do after successfully selling said hardware. I’m fairly certain the IRS would view this as a hobby until the research is complete.
Maybe not the first year, but given the length of expected research time, as well as the possibility of failure, there’s no way I would meet the “profitable 3 out of 5 years” rule. Not to mention, my background is much more related to software than hardware, which can also be used to prove that this is a “hobby” rather than a legitimate business venture.
An alternative seems to be to continue to accumulate the research costs, then after the 5 years, actually open the business and amortize the cost over 15 years, as a startup cost. But that leaves me wondering, is there a limit to how long you can accumulate start up costs for? I was reading some of the IRS publications on it, but I don’t see any mention of a time limit.
Is there any risk of me structuring this in this way?
Well, unless you start a company now, "invest" your expenses in the company (e.g. you invest your work and money), and then write them off, I don't see how this would work - IRS has no way of telling if you are actually doing a research? What for?
I could, for example, claim that I purchased a bunch of tools and materials to explore possibility of me opening a woodworking business, but that wouldn't go very far, would it?
Intent of the start-up costs is to amortize expenses directly related to purchase or incorporation of a business - legal fees, consulting, etc. etc. Simply put, they are intended to amortize the cost of a business you are already "starting", not the costs you will spend in your lifetime to rinse out the idea you have for the business. However, I might be a little wrong on this, as a skilled accountant can actually turn miracles into wine.
As to your background, it does not really matter - if you have sufficient knowledge to actually do the research you are to do and with express business intent, it should suffice.
To the start-up costs, the document you linked already explicitly states, that:
Start-up costs do not include deductible interest, taxes, or research and experimental costs.
You can elect to amortize your research and experimental costs, deduct them as current business expenses, or write them off over a 10-year period (see Optional write-off method below).
This implies you already have a business, explicitly.
If you elect to amortize these costs, deduct them in equal amounts over 60 months or more. The amortization period begins the month you first receive an economic benefit from the costs.
Also, see IRS publication 535 (2014), Business Expenses Chapter 7 - Costs You Can Deduct or Capitalize.
However, I say this from whatever limited experience with US tax legislation I have. You should really, and I mean, really consult with accountant that is familiar with federal and state taxation laws and regulations of where you reside.
I am only going to answer this question hypothetically. In the abstract only. I can not and I am not giving you any advice with your particular situation because I am not an accountant or an attorney and my answer is not intended to be accounting or legal advice. So don’t follow it! Please consult the appropriate professional to advise you for your particular situation.
Hypothetically, a hypothetical person faced with the hypothetical situation you describe might consider posing the following scenario to their CPA and see what the CPA says…
“Suppose I form a legal corporation, pay the state registration and filing fees and fund it with, say, x dollars. Then I spend that money on legally proper business expenses and follow all the IRS guidelines and procedures for doing so.”
“Could I, in that situation, then deduct the corporate losses from my personal income tax returns 100% if I am the sole owner of the corporation?”
Be prepared for the CPA to respond that the answer to that question depends upon many factors, including but not limited to the legal form of your entity and whether your corporation makes a subchapter-S election or not. This subchapter-S election will convert the entity to a “flow-through” entity for tax purposes.
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