Avoid Common Errors When Starting a New Business

It may be both exhilarating and difficult to launch a new company. Making mistakes can be expensive when starting a new business because there are numerous factors to take into account. Starting with some highlighted information based on George M. Kellett’s court experience, there will be a lot we learn in this piece.


While still employed by Bloomberg Industry Group, Kellett started developing his business website in 2013. In September of that same year, he made it public.

Four revenue streams were envisioned by Kellett for his website:

  • letting third parties use space for advertising
  • Making premium features available and charging for them
  • Selling individualized informational charts and reports via the website
  • leasing data to other businesses

Unfortunately, he didn’t make any money from his website in 2015. He didn’t start putting his approach into action and the website didn’t start making money until 2019.

Only about half of the institutions and organizations added his website to their list of research databases once he published it and affiliated it with them. He received no compensation for this.

But in Kellett’s opinion, by gaining their trust, his website fostered loyal customers and maximized revenue. He deducted the following on Schedule C of his Form 1040 for 2015:

  • Approximately $20,000 was paid to engineers.
  • Approximately $2500 was paid to marketing experts.
  • Around $1800 was spent on internet and phone services.

An IRS audit

In order to ensure that you are in compliance with the tax rules, the IRS will analyze and examine your facts and information. To make sure there are no errors in your return, the IRS is only verifying your figures.

After reviewing Kellett’s 2015 tax return, the IRS rejected all of his company expenses. The IRS claimed that because there was no revenue, his business had not begun.

Filing a lawsuit in court

In court, Kellett argued against the IRS’s denial.

The court determined that Kellett’s company did not operate according to the conventional new business pattern, in which revenue is generally seen as soon as a business is established. For instance, as soon as a new grocery store has customers, sales begin to flow in. After taking on tenants, an apartment complex begins to earn rent.

Even though Kellett didn’t generate any income in 2015, the court found that his company started offering the services that it was designed to. According to the court, this action, at least in these specific circumstances, constitutes an active trade or company that started in September 2015.

The court decreased Kellett’s deduction by 32% based on when his costs were paid. The remaining 68 percent of the costs had to be classified by Kellett as startup costs for the business, of which $5,000 was deductible in 2015 and the remainder amount could be written off over a period of 180 months.

The IRS argued that Kellett’s Verizon charges should not be reimbursed because Kellett failed to specify their business purpose. Kellett, who gave a credible deposition, stated that he utilized between 80 and 90 percent of his Verizon services for his website, but he did not provide any documents detailing his personal and professional usage.

According to Kellett’s contemporaneously created Excel spreadsheet, which showed that he worked on the site for an average of 49 hours per week during the final three months of 2015, the court was able to assess his usage of the cellular and internet services for business purposes. They calculated this by taking the 168 hours per week, deducting 40 hours for his employment at Bloomberg, and dividing the remaining 49 hours (168-40) to arrive at a $159 tax deduction (38 percent of the Verizon expenses paid after September 30).

Final thoughts:

Record all business expenses you have, including phone and internet costs. The court only took $159 out of the $1,856 Kellett spent on such costs. (No Verizon charges were taken into account when calculating his start-up costs.)

Keeping records is crucial for proof in Kellett’s case, as going to court to support your claim can be quite expensive and leave you short on funds.

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