Tax file memorandum

Subject: Profit or Loss from business

I. Facts:
In early 2010, Walter Hodges became interested in the real estate market so he initiated his investigation into the real estate market. Mr. Hodges intended to acquire real estate with the intentions for investment or rental. Mr. Hodge has no previous knowledge or exposure to any real estate rental or investment industry. As a result, Mr. Hodges began in Spring 2010 to advertise and expose his business through various promotional avenues such as business cards, flyers, and customer relations.
As Mr. Hodges promoted his business, he also completed a business plan for buying, remodeling, and renting property. Furthermore, in October 2010, Mr. Hodges …show more content…
Since, all of the Schedule C expenses were incurred and paid before March 2011, none of the expenses are deductible under section §162(a). Therefore, the justification for the disallowance of Mr. Hodges expenses was due to: (1) lack of substantiation of the expenses, and (2) the determination that Mr. Hodges was not actively engaged in trade or business as required by section §162(a). IV. Conclusion:
Eventually, it is determined that Walter Hodges was not actively engaged in the trade or business of real estate investment and rental at the time he incurred and paid the expenses that he reported as business expenses. Therefore, Mr. Hodges is not entitled under section §162 to deduct claims on his 2010 Schedule C Form 1040. After establishing that he was not actively carrying on a trade or business at the time that the expenses at issue were incurred, it was determined that Mr. Hodges activities during 2010 were start-up activities. Therefore, expenses related to that activity are not "ordinary and necessary" expenses currently deductible under section §162 or under section §212 but rather are "start up" or "pre-opening" expenses. Start-up expenses are expenses incurred "before the day on which the active trade or business begins" section §195 (c) (1) (A) (iii) - may be deducted only over time.
Walter Hodges activities in 2010 were start-up activities because he had not yet commenced the activities for which