Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions through April 15.
Q: I've been attempting to start my own business for the past three years without an income. Can I claim any of the expenses on my taxes this year?
A: Start-up expenses that are paid in creating an active trade or business cannot be currently deducted and must be capitalized and amortized over a period of at least 60 months. Therefore, assuming you are conducting an active trade or business with a profit motive, this year you could deduct one year's worth of amortization of those start-up expenses plus, as an individual taxpayer on the cash method of accounting, those expenses that are ordinary and necessary that you paid this year. You will have to amend your last two years' returns to show those expenses as well as deduct those ordinary and necessary expenses paid during those years.
Beware, however, that there is a presumption by the IRS under the hobby loss rules that if you have losses in three consecutive years out of a five consecutive-year period, you are not in business to make a profit and therefore, the losses are not deductible. You can prove otherwise by showing that you have done financial forecasts that demonstrate a profit potential and that you conduct this activity in a very businesslike manner.
Given the complexity of the situation, you should consult a professional tax adviser on the issue of whether you are indeed conducting an active trade or business with a profit motive or whether you have nondeductible hobby losses.
The above advice is for general purposes only and is not intended as legal, accounting or tax advice. Specific situations may vary.
To submit a question, call Sundial, The Sun's telephone information service, at (410) 783-1800. In Anne Arundel County call 268-7736, in Harford County 836-5028, and in Carroll 848-0338. Using a touch-tone phone, enter 6225 after the greeting. Push 1 to submit a tax question; state the question in full. Push 2 to hear the tax tip. Selected questions will be answered in the Business section. No questions will be answered by phone.