By: Cindy Toran, MBA, BA
Start-up costs for a small business are often not “small” at all. These are costs for:
- Investigating the creation of or acquisition of an active trade or business, OR,
- Creating the business, OR,
- Is a cost you pay before the day the business begins operation.
- Travel to obtain customers and suppliers
- Costs to conduct market surveys
- Advertisements for the opening of the business
- Costs to analyze available facilities, labor, supplies, etc.
- Salaries to train employees (Last week’s blog was about Hiring Your Spouse and Providing Health Benefits).
- Fees for consultants and other professional services
These costs must be amortized over 15 years unless you make an irrevocable election to expense up to $5,000 in the first year, reduced by any amount of costs that exceed $50,000. For example, if you spent $52,000 on start-up costs you could write-off $3,000 in the first year of the business [$5K less ($52K minus $50K)] plus amortize $49,000 over 15 years beginning with the month the business commenced.
The business begins on the date it starts to function as a going concern and performs the activities for which it was organized.
If the attempt to go into business is not successful, the start-up costs may or may not be deductible:
- Costs incurred before making a decision to acquire or begin a specific business are personal and non-deductible. (e.g., A taxpayer in public relations work was denied a deduction for expenses in investigating a candy dispenser business and sandwich vending machine business in which he didn’t actually engage.)
- Costs incurred in the attempt to acquire or begin a specific business are capital expenses and can be deducted as a capital loss. (e.g., a lawyer’s fee for negotiating a lease or the cost of a land survey to purchase business assets). Note that these costs would be capitalized as part of the basis of the business if successfully started, so they would not qualify as amortizable start-up costs per se.
Whether or not to elect to expense or amortize start-up costs depends on the situation. If you expect a loss or only small gain in the first year of business and significant gains thereafter, it may make sense to amortize 100% of the costs to offset future profits. Your accountant or tax professional can provide advice on your specific situation.
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Are you are at a place in your business you need tax advice. Do you have thoughts, questions or concerns regarding how to claim the start-up costs for your small business? Please feel free to contact us, leave your comments below or post to on our Facebook, Google+ or LinkedIn pages.