Deducting Business Start-Up Expenses

Have you recently started a new business or are thinking of starting one? A new venture is exciting and as you know, you generally have to spend a lot of money just to open the doors. Expenses may include training workers, rent, utilities, IT, marketing, and more.

Many new business owners are often unaware that many expenses incurred by start-ups can’t be deducted right away. It’s important to know that the way you handle some of your initial expenses can make a big difference in your tax bill.

Three key points to think about when starting or planning a new business

Start-up costs include those incurred or paid while creating an active trade or business, including investigating the creation or acquisition of one.
According to the federal tax code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. For a business, $5,000 doesn’t stretch far in today, and the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. All remaining costs must be amortized over 180 months on a straight-line basis.
Deductions or amortization write-offs are NOT allowed until the year when “active conduct” of your new business commences. That typically means the year when the business has all the pieces in place to begin earning revenue. To determine if a business meets this, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Has the activity actually begun?

Examples of start-up expenses

Start-up expenses generally include all expenses that are incurred to:

Investigate the creation or acquisition of a business,
Create a business, or
Engage in a for-profit activity in anticipation of that activity becoming an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. An example would be the money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the outlay must be related to the creation of a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing the new business and filing fees paid to the state of incorporation.

An important decision

Time may be of the essence if you have start-up expenses that you’d like to deduct this year. You need to decide whether to take the elections described above. Recordkeeping is important.