Menu

Starting a Small Business

Business Owners Can Write Off Start-Up Costs

by
Karen C. Drescher, CPA, CGMA
on
4/14/2015
Business Owners Can Write Off Start-Up Costs

Owning your own business is a lifelong goal for many people. The excitement and freedom that come from being your own boss is not without a cost, and some of the highest expenses come before you ever even open or start to earn money. Start-up expenses can add up quickly, but a tax law that allows new businesses to deduct as much as $5,000 in start-up expenses during the first year of business rather than amortizing them over fifteen years offers owners a way to recover some of their money more quickly.

There are a number of different types of expenses that are incurred during the course of starting a new business. In some cases these expenses involve the investigatory process, whether for forming a new venture or in acquiring one that is already in existence. Some of the activity involved in starting a new business involves establishing profits in anticipation of the formation of the active business. All of these expenses can be significant. In order to deduct a business expense as a start-up expense in the run up to opening, the expense must be one that would be deductible as a normal business expense once the business is actually in operation.

There are specific rules and regulations that have been established by Congress regarding how the deduction can be taken, as well as what the maximum amount is that is eligible for this benefit. For businesses with start up expenses that come to $50,000 or less, up to $5,000 can be taken in the first year, with the balance to be amortized over the following 180 months (or 15 years). In the case of businesses with start-up expenses that exceed $50,000, the $5,000 maximum write-off is reduced by each dollar over $50,000 that was spent. This means that a business that spends $52,500 in start-up expenses has to subtract the surplus $2,500 from the $5,000 maximum deduction and can only deduct $2,500, with the balance to be amortized over the 15-year period. In order to get the tax benefit for start-up costs, the deduction must be claimed by the extended due date of the business' tax return for the year that the business started up.

It is essential before filing for this deduction that a business owner understands fully what expenses are deductible in the course of doing business. In order to qualify the expense must not only be one that would be deductible by an active business in the same field, but also must have been incurred prior to the time that the business is open for business and active. There are many expenses that are not eligible, including taxes, interest, experimental costs and the costs of research. Those expenses that are eligible include:

• Salaries and wages paid to employees, instructors or consultants as part of training prior to opening the business

• Costs of conducting surveys or analysis of market conditions, products, available labor, logistical resources, etc.

• Marketing and advertisements for the business

• Fees paid to consultants for professional services prior to opening

• Costs of travel and other related expenses related to securing distributors, suppliers and customers for the new business

In the case of an existing business or trade being purchased, only the costs incurred while making the decision as to whether to make the purchase are considered to be qualified start up costs. The actual cost of purchasing a business once it has been chosen are not eligible as start-up expenses, but instead are considered to be capital expenses.

If you are the owner of a business that recently opened, or if you are in the process of starting up a business and need more information about writing off the costs that were involved prior to your business being active, call Atlanta CPA Karen Drescher for more information.

share this post
Search for matches...
Karen C. Drescher, CPA, CGMA

Karen C. Drescher, CPA, CGMA

Whether it is helping a individual or a Georgia small business with their taxes, or offering to be a backstop through their difficulties, Karen is always there for her clients. When you are a client of Karen's, she always tries to make you feel comfortable in a casual and friendly environment.

Recommended Professionals

In the face of economic uncertainty, TaxBuzz is the industry's most up-to-date tax information.

Join 60,000 who get our weekly newsletter. No spam.

Need help selecting a firm?

Use our specialized search engine and get matched to the best accounting and tax firm for your needs.

Get Started

Related Posts

Latest Posts