When Can I Start Deducting Invention Expenses?

Dear Rich: I've been working on a "green" invention for a few years but I haven't been deducting my invention expenses because I was told I had to wait until I start making the product. Is  that right? According to tax maven Steve Fishman, the general rule is that you can begin making these tax deductions once your inventing business begins using its assets to produce products for sale. However, it’s not necessary that the products be completed or sales be made. Thus, for example, courts have held that a writer’s business begins when he or she starts working on a writing project. The act of production itself is “carrying on” the trade or business of writing. Similarly, courts  have found that inventors who worked on inventions -- but never completed or patented them -- were carrying on a business. Under the logic of these court decisions, your inventing business begins for tax purposes on the day you actually begin developing an invention. Thinking or dreaming about an invention is not sufficient. You must do real work on it -- but it is not necessary for you to finish it, patent it or make money from it. A thorough and complete inventor’s notebook documenting your work is the best evidence you can have to prove when you started working on your invention.
Startup expenses. Startup expenses are a whole different topic. Unlike business operating expenses, start-up expenses cannot all be deducted in a single year. This is because the money you spend to start an inventing (or any other) business is a capital expense -- a cost that will benefit you for more than one year. Normally, you can’t deduct these types of capital expenses until you sell or otherwise dispose of the business. However, a special tax rule allows you to deduct up to $5,000 in start-up expenses the first year you are in business, and then deduct the remainder, if any, in equal amounts over the next 15 years. (IRC Sec. 195.)