From: cep@taligent.com (Christophe Pettus)
Subject: Re: Placed in Service?
Organization: Taligent, a little subsidiary of two really big companies.
Date: Tue, 5 Jan 1993 19:17:45 GMT

In article <1993Jan4.180804.28861@spectra.com> ohumukin@spectra.com (Kawika Ohumukini) writes:
>1.  When is a business "really" doing business?
>    First Income?
>    First Advertising?
>    First Purchase of related equipment or supplies?
>    Payment of DBA or Declaration of Business Tax (business license)?

The IRS' definition is that a business has started (and is thus generating
operating expenses and not startup expenses) when it has acquired the
necessary tools for the business, has placed them in service, and is
generating income.  The Tax Court and the IRS have squabbled about the
precise definition of these.  The IRS usually takes a strict view that
until you generate income, you aren't operating.  The Tax Court has
been a bit more lenient, stating that as soon as you are ABLE to produce
income, you're in business.

For example, if you are doing consulting, a reasonable definition (I'd
be willing to argue this before the IRS) is that you're in business
as soon as you sign your first contract and start work on it, since your
client is now legally obliged to pay you something, so you've generated
income.
 
>2.  Does this imply that all purchases of equipment, furniture,
>    supplies before the above date are startup costs?

Yes.  This means that you cannot deduct them at all, but can only
capitalize them (add them to your basis in the business, which you get
back when you sell) or deduct them over 60 months, starting when you
are in operation.

>3.  Can you have startup costs that continue until the end of the
>    year and then actually do business in the following year?
>    ie:  Purchases until Dec. 31 1992, start business Jan 1, 1993.

As long as you can justify those particular dates, sure.

>4.  How does the IRS determine whether or not a piece of equipment
>    is used in a business?

If you do business things with it.  If you type a business letter on a
computer, that's business use; if you type a personal letter, that's
a personal use.  The IRS usually expects to see reliable, written,
records made at the time of usage documenting what part is business
and what part is personal.

>5.  Can a non-employee, spouse, operate the equipment in accordance
>    to your business?

Yes, so long as they are doing business activities.

>6.  Can I claim expenses of equipment that must be used by two people
>    (ie: Company owner and a non-employee) such as a cellular phone
>    or other 2-way communication devices even if the other person is
>    a non-employee?
>    example:  I am on the road and my girlfriend is monitoring my 
>    business phone.  I get a message so she calls me on my cellular phone.
>    May I claim the cellular phone as a valid piece of equipment, as
>    well as other related costs of operation?

Certainly, but here's an example.  Suppose during the year you have
$200 in fees on the phone, plus $1000 in call charges.  You take only
one business call during the year, which costs $5.  Thus, only 5/1000
or 0.5% of the total use of the phone is business; this means that you
can only deduct 0.5% of $200, or $1, of the fees.  Further, this means
that you can only depreciate 0.5% of the cost of the phone, and there
are special rules for certain equipment (such as cellular phones and
computers) that are used less than 50% for business.

>I realize this is a job for a tax adviser I just want to go into it
>with some knowledge before talking to them.

Definitely discuss these issues with your tax advisor.
--
-- Christophe

"Bad analogy!  No biscuit!"