Even before a business is off the ground, expenses are often incurred, from prospecting and market research to travel and interviewing prospective employees. Essentially, you are spending money before you have the opportunity to make money. Fortunately, some startup costs are eligible for tax deductions.
The costs incurred before the business is formed are treated as capital expenditures. You can either deduct a limited amount of these capital expenditures on your tax return in that same year, or you can amortize those costs over 180 months. If you decide later not to start the business, then those expenditures are no longer deductible.
Expenses That May Be Deductible
In general, a startup cost is only deductible if it meets two criteria:
• The cost is paid or incurred before the day your active business launches.
• You could deduct the cost if you were operating an existing business in the same field as the one you plan to enter.
The expenses that may qualifying as startup costs include:
• An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
• Advertisements for the opening of the business
• Salaries and wages for employees who are being trained and their instructors
• Travel and other necessary costs for securing prospective distributors, suppliers, or customers
• Salaries and fees for executives and consultants, or for similar professional services
Unfortunately, equipment purchases do not quality as startup costs. These are considered assets of the business and can be depreciated and written off over time after the business is already an official entity.
Corporate Startups
In addition, corporations can claim organizational costs associated with forming the business that other business structures cannot. This includes everything from legal fees and meeting costs to the costs associated with bringing on a board of directors.
If your business is related to some type of new technology, science, or innovation, your development expenses may be eligible for the Research and Development Tax Credit. While the word “research” conjures up thoughts of test tubes and lab coats, even improvements to software and systems may qualify.
IRS is strict in its determination of which expenses qualify. As with anything tax-related, talk with your accountant to understand how to take advantage of startup expenses that may qualify as deductions.
If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
