I'm considering opening a part-time business with a few partners. I have a regular W-2 job as well. It will involve some startup expenses. If after some point it looks like it will not pan out, can I offset these expenses against my personal income even if the business doesn't happen in the end? What documentation will I need?

ANSWER

The BIDaWIZ Team's Answer:

You cannot deduct the investigative costs you incurred in starting a business. However, the costs that you incurred to actually start the business or purchase one would be deductible as a capital expense. This includes everything from rent and office supplies to advertising costs and mileage for business travel. You'll need to maintain receipts for all of these expenses. Where and when you take the deductions will depend on how the business was organized and operated. If the business was incorporated, your loss will be the difference between the cash and assets you invested in the business and the value of what you received when you liquidated the company. Whether you were incorporated or not, your losses can be carried back and forward to reduce your tax liability in previous or subsequent years. Again, if the IRS believes you did not make a legitimate attempt to make your business profitable, it can argue you were engaging in a hobby rather than running a business. Hobby losses are not deductible.