To: Tax File
Date: 10/30/12

Facts:
Walter Hodges wants to begin a business involving real estate. In spring of 2010, Walter began marketing his business. In October, Walter paid $25,000 for training classes. In November 2010, he obtained a loan of $145,000. Also, in November he obtained an employer ID number from the IRS. In December 2010, Walter opened necessary banking accounts for his business. Walter was able to acquire his first property on December 30 2010. He listed the property and began renting it successfully in March of 2011. Walter prepared a schedule C and listed a business loss of $29,000, which includes the cost of the training classes, automobile expenses, meals and entertainment, computer and software expenses, and supplies. The IRS has disallowed the deduction of $ 29,000.

Issue: Is Walter allowed to deduct the business loss of $29,000 in 2010?

Conclusion: The $29,000 loss is not considered as business expense; therefore, no deduction is allowed.

Analysis: The loss of $29,000 is not deductible, because Walter was not “engaged in the active conduct of trade or business” in 2010. Under 26 U.S.C.S. § 162, it generally allows deduction for all the ordinary and necessary expense incurred during the taxable year. However, the taxpayer in Woody v. Comm’r, T.C. Memo 2009-93, attempted to deduct his business expense incurred during the taxable year, which he was preparing for starting business. Court considered that “A taxpayer is not carrying on a trade or business under section 162(a) until the business is functioning as a going concern and performing the activities for which it was organized." The expense incurred would consider as “start-up” or “pre-opening” expense rather than business expense. Therefore, there was no deduction allowed.
To decide whether a taxpayer is engaged in the active conduct of trade or business, court