Access Leading Tax Experts And Technology
In Our Global Digital Marketplace

Please enter your input in search field.

Start-Up, Research Expenses, and Other Itemized Business Deductions

Tax Court In Brief: Freeman Law Firm, Texas

Kellett v. Comm’r, T.C. Memo 2022-62 | June 14, 2022 | Greaves, J. | Dkt. No. 21518-18

Opinion

Short Summary: The IRS disallowed a $25,922 business expense deduction resulting in a corresponding deficiency of $6,475 in 2015. The taxpayer ran a business information website which started upon the opening of the website in September 2015. The business compiled demographic, social, and economic data and attempted to make a user-friendly version of Google or Yahoo Finance. He worked with engineers to develop features that he wanted on the website and hired a marketing specialist. Initially, he envisioned the business would generate revenue from advertising, a paywall, selling personalized reports, and/or licensing fees for use of data. He did not pursue these strategies in 2015 and did generate revenues until 2019. On his timely filed 1040, the taxpayer claimed expense deductions for the engineers, a marketing strategist, cell and internet service cost from his home, and some miscellaneous expenses. The IRS denied all deductions on the grounds that the business had not started.

Key Issues:

  • When does a business start for purposes of § 195?
  • Can a taxpayer expense the costs of developing software under § 174 before the business technically begins, or is he solely relegated to relief under § 195?
  • Can a taxpayer use Rev. Proc. 2000-50 to deduct the costs of developing a website?

Primary Holdings:

  • The regulations do not provide a definition for this matter. Therefore, the Tax Court will use any rule developed by the appropriate appeals jurisdiction. In this case, the taxpayer’s business began in September of 2015 because that is when it began providing the services for which it was organized. Any expenses incurred before this date must be taken under § 195 and any expenses after this date are taken under § 162.
  • Under these circumstances, the taxpayer was not allowed to take a § 174 deduction since he merely adapted a widely used software rather than developing it from whole cloth.
  • The Court provides that this revenue procedure cannot create a deduction for the taxpayer by itself. Thus, if the taxpayer does not make an argument that the procedure is consistent with the Code in some way, then he cannot claim a deduction from it. Furthermore, it cannot act to estop the government because he relied on the revenue procedure’s guidance.

Key Points of Law:

Read More

%d bloggers like this: