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Client began business 4 years ago mixing specialty drinks at parties and, primarily, at a local farmer's type market in a stand.  It was moderately successful so she thought she could make a start to her eventual goal of a facility for party space, food court, and she would be providing the drinks. 

Big planning began at the end of 2019 and in early 2020 she engaged an attorney to represent her and ideas to a local board in a community where she found a great space for development.  She had an architect draw up extensive plans and made a well-received presentation.  The board awarded her idea $8000 or so in support once she had a lease agreement for the location.  That lease agreement has to be approved by a zoning board and is stalled and has been for over a year.

She has these significant expenses but no income.  The facility and all income was to be under the name of the original LLC as an expansion.  I'm struggling to see how they can be deducted currently as it appears to be start up costs but they aren't really.  She was in business already, this is the enlargement of the original plan.  So deductible?  What if the board withdraws the funding?  If she can't get a loan to buy the containers (she wants to use shipping containers)?

She has another meeting on April 28 for status but I want to complete her returns; just not sure if this is a different business but it isn't, just an expansion but she has no income for 2020 but...I could go on.

Any insights out there?  She is really hurting financially now having withdrawn more retirement funds than she should have with not enough tax withheld and jumping into the next tax bracket. 

 

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You know her situation best, along with her, of course. But the way you explain it, it sounds like the same business, business expansion, new location.

By the way, was she affected economically by Covid? Would she qualify to spread her distribution income over three years and avoid the 10% penalty?

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Lion, she has described this exactly as an expansion of her existing business.  Affected by COVID?  Most certainly, however she stated that she withdrew a lot of money to put into her house thinking that the business plan would be approved and all would be wonderful.  There was no 10% penalty as she took from her pension as a retiree (firefighter). 

The issue here is whether I can put those attorney fees and architect fees as deductible with zero income.  Before everything shut down she also traveled to a couple of other cities that have 'container venues' to check them out as her outdoor farmer's market business isn't available over the winter.  But before she could set up again with warm weather, well, we know what happened.

Okay, I will input the deductions as a business expansion.  Thanks for the support/clarification/reply.  I feel better about it even with no income.   She never tried to get any loans or grants or anything and had no employees.  Remember it was fairly recent the sole props could apply.  My guess is she won't want to go through with this and, frankly, I really don't want to deal with it either but will mention it.  Her choice.

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It sounds like she qualifies for the 3 year spread on her retirement distributions.

I would deduct the attorney fees, but the architectural fees are in limbo to be capitalized if and when the project comes together..

I would also deduct the business expansion related travel expenses. 

I have seen this before with clients who emotionally can't let go of a business failure.

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Eligible retirement plans that can make coronavirus-related distributions include all plans that are able to receive plan rollovers. Eligible retirement plans include:

Traditional IRAs

Roth IRAs

Simplified Employee Pension (SEP) IRAs

Savings Incentive Match Plan for Employees (SIMPLE) IRAs

Salary Reduction Simplified Employee Pension (SARSEP) IRAs

Profit-sharing plans

401(k) plans

Pension plans

403(b) plans

Governmental 457(b) plans

403(a) plans

 

If her distribution was from a qualifying plan, it doesn't matter what she used the money for, she still gets the 3 year spread.

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Why would she get the 3 year spread on retirement distribution when it was not used for business?  She specifically told me that she was putting it into her house but had anticipated the business thing would work out.

I will have her provide the travel expenses.  I am not ready to call this a failure yet nor is she.  When the community board supports her 8-0 and funding because they thought it was a good idea, it seems early to call it a failure.  We will know more after the 28th.  I just think everyone pulled way back when COVID hit the fan. 

Thanks for the input!

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Keep in mind that where the money from the distribution went doesn't matter. If the person, spouse, dependent or household member was affected by covid-19, the distribution can be reported evenly for the next three years. She could potentially, roll over 1/3 before she files for 2021 and another 1/3 before she files for 2022 if her business gives her profits.

If her business was shut down at the farmer's market for a couple of months, that's enough reason to be affected by covid 19.

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