Can an IRA early withdrawal be deducted as a business expense if used to cover business costs?

Forum|Forum|1 year ago
April 8, 2025
2 replies
9 views

The taxpayer wants to claim the penalty from their early IRA withdrawal as a business expense because they used the full amount to start a business. I’m pretty sure the answer is "no, you still have to pay the taxes and penalty," and you report your regular business expenses separately on Schedule C. But I just wanted to double-check, since they’re insisting it’s possible.

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sjrcpa

Level 15

No. Penalties are never deductible, even when incurred by a business (which this is not)

The more I know the more I don’t know.

qbteachmt

Level 15

"because they used the full amount to start a business."

With some planning, there are ways to use the IRA to start a business, but it's too late now, of course.

Tell them the source of the funds doesn't matter for starting a business. It's the use of the funds that would matter, for purposes of the business. The spending matters. Not the getting of the money for the spending.

And to be honest, you can bet a client like this won't understand business startup costs or operating costs vs tax reporting expenses, either. This should be fun...

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