Which costs can we deduct, if any?

July 26, 2007 10:15 PM

I started a voip company in California, with a friend which we will give up soon. Costs were: dedicated hosting, buying servers, telephony hardware, web hosting, headsets, and our own Internet / cell phone services. My question is, what can we deduct on our taxes, if anything? This seems like it should be a common situation. Oh, and we never registered as a corp or partnership.
posted by lpctstr; to work & money (2 comments total)

Oh man. You really should have incorporated. Before doing anything crazy with the taxes, get thee to an accountant!
posted by zackola at 6:10 AM on July 27, 2007 [1 favorite]

(IANA tax professional of any stripe; I've just done a number of returns for my sole proprietorship.)

First off, you'll have to prove that it's a business and not a hobby. This is normally not a problem, but given your lack of paperwork and (presumable) lack of profit, your return will face a fairly high probability of being audited. Be prepared to document that you were running a legitmate business.

Secondly, operating expenses (hosting, Internet service, cell phones) would be deductible in accordance with IRS regulations

Thirdly, capital assets (servers, headsets, etc.) would normally have to be depreciated over a number of years, although you may be able to take an immediate section 179 deduction on some/all of those assets. Whether you would want to depends on your personal tax situation.

If it were me, I would get a pro to do this year's return. If you want to risk it, though, you should be able to do the return yourself with a "business" version of TaxCut or TurboTax, although it may take some effort to understand the large stack of forms the software prints out and how the return will affect your future taxes. Also, as noted, you're facing a pretty strong chance of being audited, so make sure everything is documented according to the IRS' requirements and that you retain all documents for the length of the audit window (3 years, I think?).
posted by backupjesus at 6:22 AM on July 27, 2007