From 2007 to 2011, a taxpayer reported net losses for her agricultural pursuits on a Schedule F. For 2012 and 2013, the taxpayer and her husband filed joint returns on Form 1040. The taxpayer claimed $1,068 in farm activity income in 2012 for the sale of excess eggs she did not need and $4,800 in 2013 for the sale of several cows. She also reported deductible expenses for both those years and claimed the losses as a deduction. The IRS disallowed the deductions because it did not believe the taxpayer incurred the losses carrying on a trade or business. The taxpayer appealed.

From 2007 to 2011, the taxpayer raised chickens for meat. She only reported one sale in 2011. The taxpayer switched to raising chickens for egg production, but decided that was financially unfeasible because of the increasing price in chicken feed. She then switched back to raising chickens for meat and began growing her flock. The taxpayer intended to begin selling the product in 2014, but wild dogs destroyed most of her flock that year.The taxpayer also experimented with raising verious fruits and vegetables and cattle on her farm, but those activities were not successful.

The Internal Revenue Code allows a deduction for all ordinary and necessary expenses incurred carrying on a trade or business. 26 U.S.C. § 162(a). The IRS disallowed the taxpayer’s deductions finding that she did not have a true profit motive and her business operation had not yet started in 2012 and 2013 when the deductions were claimed. On review, the tax court found that despite the lack of revenue, the wife did intend to profit. However, startup costs are not currently deductible. 26 U.S.C. § 195(a). Startup costs include cost incurred when starting a business and may be allowed as a deduction prorated equally over a 15-year period once the business begins. 26 U.S.C. § 195(b). The court found that the taxpayers business never moved beyond the initial startup stage. In 2012 and 2013, the taxpayer was still planting test crops and investigating business opportunities because none of her attempts had been successful yet. Because most of the expenses reported were startup expenses, the court affirmed the denial of the deductions.

Costello v. Commissioner of Internal Revenue, T.C. Memo. 2021-9 (Jan. 25, 2021).