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I am a resident of California (Green Card holder), and started a new business in 2018 to evaluate an idea I had. It was not registered in state of CA as I was not sure how far the idea can go. Anyway, I spent some money paid in cash to consultants in India by transfering money to a family member and route them to the consultants.This was to help develop an app and I was going for speed. I have the receipts from the Indian consultants in Indian currency but they are small group, so are not able to help much in providing any additional documentation.

Can I claim these expenses as business loss for 2018 and if so, what form should I file? What documentation will I need to keep in case IRS decides to audit and request documentation? This is new to me and as I am bootstrapping with my own savings, any help is appreciated.

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A proprietor business uses a Schedule C.

Here is a link where marketed software is noted as capitalized during development and expensed while marketed. That's true when the development is known to be technically feasible:

https://www.withum.com/resources/tech-companies-deal-software-development-costs-insights-cpa/

Then software that is not marketed is expensed during the planning stage, capitalized during the development stage, and expensed during the operational stage.

It really seems very similar.

Of course a capital expense is taken as a yearly depreciation amount while an operating expense is taken fully in the year incurred.

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  • I paid these expenses in India when I traveled there in local currency using the money I transferred to my parents account. In hindsight, I should have transferred directly from my US bank account. Are there any documents needed to properly capture this as expense as most of the expenses in 2018 were for planning stage based on the document?
    – footballfangb
    Commented Feb 10, 2019 at 22:26
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    The financial records combined with explanation or deposition is the accounting. The tax preparer just looks at the records to make their own opinion. The IRS only looks at the records if they audit.
    – S Spring
    Commented Feb 10, 2019 at 22:36

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