The Tax Court looked at the operations of a new enterprise and concluded that its first year expenses could be deducted in full and did not have to be treated as amortizable startup expenditures.  The court held that expenses paid for the production of income from a horse boarding and training facility were deductible even though the expenses may have been incurred in the pre-operating phase of the horse farm becoming an active trade or business.

The decision was important because the startup expenditures, after an initial off-the-top $5,000 deduction must be spread out over a 15-year period. The decision allowed the taxpayer to deduct all her first year expenses and reduce her initial tax burden when it was most important to reinvest earnings in the business.

In 1998 the taxpayer purchased land and began operating the horse facility for profit.  Income was modest but gradually increased as she expanded the facility and her staff. By 2006, the facility was earning approximately $3,000 a month.

The IRS conceded that the taxpayer operated a business.  This was important because expenses ordinarily cannot be deducted until the taxpayer is in business.  The rules for amortizing startup expenses apply to amounts paid for the production of income before the day on which the activity begins, which would be deductible if paid in connection with an active business.  The Tax Court said that the rules for startup expenditures do not override the deduction for expenses incurred in an ongoing business. 

If you are thinking about starting a business or would like to discuss this decision, please give our office a call.

(Toth, 128 T.C. No. 1)