Starting a Business? How You Should Treat Expenses on Your Tax Returns.
Have you recently started a new business? Or are you contemplating starting one? Launching a new business is a hectic, exciting time. And as you know, before you even open the doors, you generally have to spend a lot of money. You may have to train workers and pay for rent, utilities, marketing and more.
Entrepreneurs are often unaware that many expenses incurred by start-ups can’t be deducted right away. You should be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.
Key points on how expenses are handled
When starting or planning a new business, keep these factors in mind:
- Start-up costs include those incurred or paid
while creating an active trade or business — or investigating the creation
or acquisition of one.
- Under the federal tax code, taxpayers can
elect to deduct up to $5,000 of business start-up and $5,000 of
organizational costs in the year the business begins. We don’t need to
tell you that $5,000 doesn’t go far these days! And the $5,000 deduction
is reduced dollar-for-dollar by the amount by which your total start-up or
organizational costs exceed $50,000. Any remaining costs must be amortized
(deducted) over 180 months on a straight-line basis.
- No deductions or amortization write-offs are allowed until the year when “active conduct” of your new business begins. That usually means the year when the business has all the pieces in place to begin earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Has the activity actually begun?
- Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.