corporate structure

[Raja Gupta]

I am planning to get an app developed for real estate. I don't think this app will make any money for at least two years. I would like to expense the app development expense for these two years. I am thinking of setting up sole proprietorship structure

1) I have hired a firm offshore for software development. Can I expense the software development expense to bring down my taxable income from my full time job. Is there a limit to how much can be expensed ?

2) If I cant expense the whole software development expense? then the question is..

I have some bonds which generate consistent interest income. Can I transfer them to this sole proprietorship structure and use the interest from them to pay for software development expense and hence create a tax advantaged structure ?

Thanks so much for your response.  

[Brandon Hall]

@Daniel Chang excellent advice for the majority of the situations. You certainly hit on the general rule of thumb. 

However, R&D costs (software development) are treated differently. These costs are treated as the development of intellectual property and can be currently deductible under Section 174 even if income has not yet been earned. The taxpayer will, however, need to prove a "for profit" motive for the business, otherwise the taxpayer may subject themselves to the hobby loss rules (not showing net income for three of a consecutive five years) which has been aggressively litigated by the courts.

The issue with your travel app is that it doesn't seem like you'd be doing it with a "for profit"  motive :) Otherwise it could be legitimate.

Additionally, first time flippers are generally considered "in business" the second they close on their first property. At that time they are engaged in a business with a for profit motive and some costs become currently deductible even if they don't sell the flip until the following year.

While showing income is important, it is not a bright line test for being "in business."

Accounting is confusing eh?

@Raja Gupta seek a qualified professional to advise you on your business venture. Doing something as simple as making pre sales can erase all doubt.