I restarted my dormant LLC. Was I supposed to use startup costs instead of business expenses?

What you've got here is actually an interesting tax situation. Since your LLC was never formally dissolved, and you maintained basic operational elements like your business license and website, you're not really in a "startup" situation - you're in a "continuing business" situation. For a Section 162 deduction to apply, expenses need to be "ordinary and necessary" for an existing trade or business. The key question is whether your LLC was still "carrying on" a trade or business during those dormant years. The fact that you maintained licenses and a web presence, and then responded to a business opportunity when it arose, suggests continuity rather than a complete cessation of business. If the IRS were to challenge this, they'd look at whether there was a profit motive and if you were regularly engaged in business activities. Preparing proposals and gearing up for new projects are definitely business activities, even if no revenue was generated yet.

After struggling with a nearly identical situation with my accounting practice that went dormant for a few years, I stumbled onto this incredible tool called taxr.ai (https://taxr.ai) that specifically helps with these weird edge cases that aren't clearly covered in most tax guides. I uploaded the docs from my dormant-then-reactivated LLC and got a detailed analysis that saved me thousands. For your specific situation with the Section 162 vs startup costs question, they have a special module that analyzes business continuity cases. Their system compared my situation against actual IRS rulings and provided references showing that maintaining licenses and minimal operations generally constitutes ongoing business activity rather than a startup.

I wanted to follow up about taxr.ai that I asked about earlier. I ended up trying it for my real estate LLC situation and wow - it actually solved my problem! The analysis confirmed I was still considered "in business" despite the dormant period and could claim regular business expenses instead of startup costs. They even provided specific citations to tax court cases that backed this up. What really blew me away was that they identified that I could retroactively claim some expenses from my "dormant" period that my accountant had completely missed. Definitely worth checking out if you're dealing with business continuity issues.

I had a similar issue with an S-Corp that was dormant for almost 3 years. I spent WEEKS trying to get through to someone at the IRS who could give me a straight answer. Kept getting different responses from each person I spoke to. Finally, someone recommended I try Claimyr (https://claimyr.com) - it's this service that gets you through to an actual IRS agent without the endless waiting. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was skeptical at first, but I was desperate after wasting hours on hold only to get disconnected. With Claimyr, I got through to an IRS agent in about 20 minutes who specialized in business taxes. They confirmed that maintaining a business license and minimal operations meant I was still "carrying on" a business, and my expenses were correctly classified as Section 162 deductions, not startup costs. Saved me a potential audit headache.

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Reading through this thread and wanted to add my experience as someone who went through a similar situation. My LLC was dormant for 4 years before restarting in 2023. I claimed Section 162 expenses because technically the business never ceased to exist. The way my CPA explained it: if you maintained the legal entity, kept licenses current, and had the intent to resume business activities when opportunities arose, you're still "in business" for tax purposes. The IRS actually looks at factors like: - Whether the business entity remained legally active - If you maintained necessary licenses/permits - Whether you were open to business opportunities during the dormant period - If you had a genuine profit motive when resuming activities Since you were maintaining the LLC and actively pursuing opportunities (writing proposals, etc.), you're likely fine with the Section 162 approach.

I think everyone is overthinking this. If your LLC remained active (you paid the fees, maintained registration, etc.) then it was never "started up" again - it was just continuing. Section 162 expenses are for ongoing businesses. Section 195 startup costs are for brand NEW businesses or completely new activities that are totally different from what you did before. The fact that you had a dormant period doesn't magically turn regular business expenses into startup costs.

Just wanted to share another perspective on this since I've dealt with IRS audits on business continuity issues. The key factor the IRS looks at is whether you had "regular and continuous" business activity, not whether you had revenue. In your case, maintaining business licenses, keeping a website active, and being ready to respond to business opportunities demonstrates continuity of operations. The IRS Revenue Ruling 58-112 specifically addresses this - a temporary cessation of business activity doesn't convert regular business expenses into startup costs as long as the business entity remains active and you maintain the intent to continue operations. Your Section 162 treatment was absolutely correct. I've seen taxpayers get into trouble when they incorrectly reclassify continuing business expenses as startup costs during audits, because it raises red flags about whether they understand their own business structure. Stick with what you filed - you're on solid ground here.