Deducting last years (undocumented) side business loss

Question

Last year (January 2011-August 2011) I hired a company in Europe to build me a software product, which I intended to resell as a for profit business. I am a us citizen and have lived and worked here my entire life.

I spent $20,000 on this venture, and it was a complete and utter failure. All the while, I was working a full time job. I have no record of the business being established (though I did get a business name), and have since closed the business banking account There is very little evidence that the "business" ever existed. I do however, have record of all the payments I made, which amount to $20,000. I say "business" because I never even turned a profit.

When tax time came around for 2011, I had no idea I could deduct these expenses from my overall tax bill. I am wondering now if when tax time comes around this year, I can deduct those losses from my 2012 bill. I know I need to speak to a lawyer and accountant probably, and I will, but any general advice would be very much appreciated.

(And yes I know it was idiotic overlooking the deductions last year but I am just a young guy and had no experience.)

Answer 1

You should speak to a good tax adviser. The less documentation you have the more problems IRS are going to cause you. Generally you can deduct business losses (in the year they occurred, which is 2011), but you have to show that that was a valid business, not just a way to reduce your tax bill with personal expenses. Thus lack of documentation reduces your ability to prove that you're entitled to the deduction. The burden of proof is generally on you.

You can not deduct it from 2012 taxes, but you can still amend 2011. Keep in mind though that amended returns have higher chance of audit, and a significant business loss on a business that only existed that year is a major red flag which will raise the probability of an audit to very high percentage.

Theoretically, if the business was real and just failed - you can definitely deduct this. But practically, lack of documentation may cause too big a problem, and a tax adviser might suggest you giving it up if he doesn't think you have a real chance to convince the IRS.

Definitely don't do that without a professional advice. It is worth fighting for, its quite a loss, but don't do it on your own as you will definitely lose.