J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Aborted Business Ventures

What happens if you investigate the purchase of a business or the start of a venture but the deal never goes through? Or if you hire an architect to design a building but never get town approval for the construction? The costs of starting up and organizing a business are not immediately deductible in full (but may be amortized, as explained in Chapter 14). However, the costs of an aborted business venture are immediately deductible.

To deduct your costs, you must have proceeded beyond a general search. Once you focus on a particular business and the deal falls through, you can deduct your expenses. Mere investigatory expenses are not deductible; only those related to a specific business are. Thus, for example, if you travel to look at various business opportunities, you cannot deduct your travel costs. But once you select 1 particular business and begin drawing up contracts, your legal costs for the contracts are deductible even if they never get signed.

The Tax Court has allowed a deduction for a $25,000 fee paid to acquire a franchise where the purchaser decided to walk away rather than complete the deal after learning that the franchisor had flooded the area with stores, many of which were losing money.