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Starting a Small Business

Helpful Tax Tips for Business Start-ups During the First Year

by
Frank Jenkins Jr
on
4/16/2017
Helpful Tax Tips for Business Start-ups During the First Year

If you thought that starting a new business was a challenge, just wait until you find out about the taxes! Most people assume that a first-year business is able to simply write off all of their expenses, but the reality is that there are different rules for different types of costs. If you don't completely understand what you're doing, you run the risk of losing a tax advantage, or being penalized for taking a deduction to which you're not entitled. Here are just a few of the things you need to know as you take the leap into entrepreneurship. 

Buying A Car for Your Business?

Whether you need a truck for hauling, a van for deliveries, or a sedan for making trips to see clients, vehicles are treated in the same way as all other equipment that a business purchases, with two exceptions: they are subject to what are known as luxury auto rules, and their recovery period is five years instead of seven. You are limited to no more than $3,160 in depreciation for a car in its first year and a slightly higher amount ($3,560) for a van or light truck. If you elect to take the bonus depreciation, you can add $8,000 to those figures for the first year.

Understanding How to Maximize Equipment Deductions

Different businesses need different types of equipment, and there can be a significant time lag between when you make your purchase and when you finally start to put it to good use. Unfortunately, equipment deductions cannot be taken until it is actually in service, and for tax purposes this is defined as when the business is operational. Though this can feel punitive, the good news is that there are liberal rules to offset this restriction. As long as the equipment is bought in the same year that it starts to be used, a small business owner can use the Sec 179 expensing election and write off the entire purchase in its first year. The restriction to this rule is that the amount to be deducted is limited to the taxpayer's taxable income from their business or trade, though this can include that of your spouse (and their W-2 income too) as long as you are filing jointly.

The fact that you are able to write off the entire cost of your equipment purchase right away does not, however, mean that it is the smart thing to do. Some businesses find that it is more advantageous to depreciate the cost over the equipment' useful life. This option requires checking on what the IRS says are appropriate recovery periods, but in most cases that is defined as 7 years. The exception to this rule is computers, which have a 5-year recovery period. If you do decide to depreciate, keep in mind that you can take a 50% bonus depreciation for the first year.

Leasehold Improvements Depreciate Over A Long Period of Time

When you make the decision to improve the interior of the business property you're leasing, make sure you understand that it is going to take 15 years for it to depreciate. The good news is that for the next few years, you can take a bonus depreciation for the first year on qualified improvements of between 30 and 50 percent, though these can only be taken after the space is in service. This is true through 2019 for office space, restaurant properties and retail properties that meet the requirements under Sec 179.

The $5,000/$50,000 Start-Up Cost Rule

When you are starting up a new business, there are a lot of extraneous expenses. A lot of these can be deducted, including surveys that you pay for to analyze the market, labor supply or other business factors; salaries and wages that you pay to employees while they are being trained, or for instructors who are training them; marketing regarding the new business; consulting fees involved in the opening of the business; and travel expenses required to set the business up.  You are able to elect to take up to $5,000 in these types of, but that amount can quickly diminish if you spend over $50,000. If that happens, whatever you spent over the $5,000 gets amortized over 15 years, where by contrast, if you choose not to take the election you have to capitalize those costs. That means that you will only get your money back when you sell or close the business.  

How Will You Organize Your Business?

One of the most important questions that a new business has to answer is what type of organizational structure it is going to assume. This is more than a philosophical question: arriving at an answer and putting a plan into place can represent a sizeable expense for a new entity, including legal fees, temporary directors' fees, and organizational meeting costs. An election is available that allows up to $5,000 of those expenses can be deducted (in addition to other start-up expenses). The rules for organizational expenses are similar to those of start-up expenses in that the amount that can be deducted will be reduced and amortized over 15 years if they exceed $50,000. Those businesses that do not elect this option must include the organizational expenses in their capital outlays.

New business owners have a lot on their plate, and a lot more to learn. If you are in need of assistance on tax issues, including first year deductions, work with a qualified professional to make sure that you are doing everything you can to maximize your financial position.

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Frank Jenkins Jr

Frank Jenkins Jr

Frank Jenkins Jr. is the managing partner of Adams, Jenkins & Cheatham, a CPA practice based in Midlothian, VA. Frank specializes in Consulting services, tax planning, accounting, audit & assurances. "I genuinely care about our clients because I have a personal connection with them. This job requires me to multi-task and work under tight deadlines. I get great professional satisfaction from balancing firm and client commitments while building a strong team here at AJC."

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