is money spent on due dilligence deductible

[Naveen Mohan from New York]

I have a client who was going to purchase a gas station business from 7-Eleven but he found the gasoline tanks were leaking so he did not complete the sale.

 

However 7-Eleven refused to refund his deposit and he lost another $ 15,000 in legal fee and environmental testing before finally abandoning the project. 

 

Is any of these expenses deductible in his personal return? 

 

thanks for your help.

 

Naveen Mohan

[jklcpa]

I'm thinking a lot of that should be a capital loss.  See what you think after reading  pub 535, page 3, middle column at the bottom under the heading "going into business", if you don't go into business and the expenses were incurred for a specific business or project.

 

About the legal fees, were those to handle the purchase of the business and all that involves, or was part of that to try to recoup his deposit?  The part of the legal fees that were for the investigation and purchase of the specific business, I'd consider part of the capital loss.  If part of those legal fees were incurred in an attempt to recoup the deposit, I'd be inclined to separate that out and put that portion on Sch A as a miscellaneous itemized deduction as legal fees that are paid for the production or collection of income, or preservation of assets.

 

Those are my thoughts right now on how I would consider this without research. Maybe some of our other members with more experience with purchasing businesses will chime in if I'm off the mark on this.

[kcjenkins]

You are right on point, Judy.  

[rfassett]

In addition to the spot on answer above, I would simply ask if the monies were spent personally; or did he have an entity set up that the money was being funded through? It would make a difference in the answer.

[BulldogTom]

Naveen,

 

This is off topic, but I have been thinking about you.

 

Hope you are hanging in there strong.  Let me know if there is anything that I can do for you.

 

Tom

Newark, CA

[Naveen Mohan from New York]

Thanks Tom. My wife passed away on January 21st. We were married 37 years. Right now each day is a struggle because we live in a very rural area so combating loneliness is a big challenge but I have to get through it. This was the God's will.

 

Thanks again for you remembering me

 

Naveen Mohan 

[B. Jani]

Please accept my condolences. God will give you strength to pass thru this tough time.