Launching a new business can be both exciting and challenging. Your vision of the business is what energizes you, and that’s important. As Tony Hsieh, CEO of Zappos said, “Chase the vision, not the money; the money will end up following you.” That said, you can’t casually address the financial aspects of the business. Specifically, pay close attention to your start-up expenses and how they are treated relative to taxes.
What Are Start-up Expenses and Why Are They Important?
New businesses normally incur some costs before beginning active business operations. These are termed start-up expenses. Start-up business costs are treated differently versus regular operating costs and they need to be filed differently for tax purposes. The categorization of the start-up expenses is typically more complex than regular financial accounting. Further, many of a business’ start-up expenses can’t be deducted immediately.
Start-up costs include:
- Costs required to investigate the potential of creating a new business.
- Costs to organize a business, including legal fees, setting-up accounting services, filing fees, and necessary organizational meetings.
- Costs for consultants and professional services including lawyers and accountants.
- Costs to advertise and market the new business prior to beginning active operation.
- Costs for employees prior to the opening of the business.
- Costs for research and experimentation.
- Intangible costs including business books, records, and operating systems, patents, copyrights, trade secrets, licenses, and trademarks.
How Does The Tax Code Work for Start-ups?
According to the tax code, a business can deduct up to $5,000 of start-up costs and up to $5,000 of organizational costs in the year the business begins—that is revenue-producing operations. Thereafter, the $5,000 deduction will be reduced dollar-for-dollar by the amount that your business exceeds start-up costs of $50,000. Any costs beyond the $50,000 must be amortized over a 180-month time frame.
4 Keys to Utilizing Start-up Expenses
Maximize your business tax advantages by:
- Learn how each expense category is treated differently by the IRS.
- Make sure that start-up expenses are properly deducted.
- Include research and experimentation expenses in your deductions, including purchases for items used to support the planning of your business including computer supplies, equipment that is rented to conduct research, and money used to pay employees or contractors to assist in your developmental pre-opening research.
- Don’t do it alone. Get professional assistance in the financial planning of your business so you can record all expenses accurately and treat deductible expenses to your best tax advantage. Funds are usually scarce in the beginning of a business, so it is to your advantage to get the best tax situation as you begin.
Get Professional Start-up Expense Assistance
Contact Doerhoff & Associates, CPA, serving Jefferson City and Central Missouri for your accounting and tax needs. We provide full-service accounting assistance to help your start-up or existing business succeed!