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The launching of a new business is an exciting but hectic time. If you have recently started a new business, or might soon you are probably aware that the process is costly, even before turning a profit. Expenses can include rent, utilities, marketing, and training employees.
Often entrepreneurs are not aware that some expenses incurred by start-ups aren’t deductible right away. This means that the handling of start-up expenses can make a large impact on your tax bill.
When planning for a new enterprise here are a few factors to keep in mind:
- Start-up costs include the costs incurred or paid while creating active trade or business, or while investigating the creation or acquisition of one.
- Taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the first year of business. This $5,000 deduction is reduced dollar-for-dollar by the amount your start-up or organizational costs exceed $50,000. Any remaining cost must be amortized over 180 months on a straight-line basis.
- No deductions or amortization write-offs are allowed until the year “active conduct” of your new business has started. This usually means the year your company begins earning revenue. To determine if a business meets the requirements for active conduct the IRS and courts generally ask questions including: 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 Expenses
Start-up expenses generally all expenses incurred for the following purposes:
- Investigating the creating of acquisition of a business
- Creating a business
- Engaging in a for-profit activity in anticipation of that activity becoming an active business
For an expense to be eligible for the election, it must be one that would be deductible if incurred after a business has begun. One example of such an expense is the money spent analyzing potential markets for a new product or service.
To qualify as an “organization expense,” the spending must be put toward to creation of a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing the new business, or filing fees paid to the state of incorporation.
If you have start-up expenses you would like to deduct this year; time is of the essence. Now is the time to decide if you would like to take the elections described above. Contact us about your business start-up plans, and we can help with the tax aspects of your new company.