Launching a new business takes hard work — and money. Costs for market surveys, travel to line up potential distributors and suppliers, advertising, hiring employees, training, and other expenses incurred before a business is officially launched can add up to a substantial amount.
The tax law places certain limitations on tax deductions for start-up expenses.
- No deduction is available until the business becomes active.
- You may deduct up to $5,000 of accumulated start-up expenses in the tax year in which the active business begins. You have to reduce this $5,000 limit (but not below zero) by the excess of total start-up costs over $50,000.
- Any remaining start-up expenses, you may deduct them ratably over the 180-month period beginning with the month in which the active business begins.
Gina spent $20,000 on start-up costs before her new business began on July 1, 2019. In 2019, she may deduct $5,000 and the portion of the remaining $15,000 allocable to July through December of 2019 ($15,000/180 × 6 = $500), a total of $5,500. She may deduct the remaining $14,500 ratably over the remaining 174 months.
Instead of deducting start-up costs, a business may elect to capitalize them (treat them as an asset on the balance sheet). Deductions for “organization expenses” — such as legal and accounting fees for services related to forming a corporation or partnership — are subject to similar rules.
You can find out more information about the destructibility of start up and organizational expenses in IRS Publication 535, Business Expenses.
If you opened or thinking of opening a new business and have questions about what expenses you can deduct, how you should set up your entity for tax purposes, how to set up your QuickBooks, how to use QuickBooks, what other reporting might be involved, such as payroll reporting, sales tax reporting, we are here to help. Give us a call!