THINKING ABOUT STARTING A BUSINESS?

What a great time of year it is, the weather is starting to warm up, we have March Madness, and most important(lol) the end of the tax season. Tax season doesn’t have to be a stressful time, but it can be without the proper record keeping. I will talk about an aspect of starting a business below, but if you do have a business or are thinking about starting one(I believe everyone should have some “side hustle” or means to create additional income outside of a job) having a strong infrastructure in place will not only prep you for taxes but put ultimately allow you to be more efficient in running your business. Two main reasons businesses fail are poor time and cash flow management. I am in the business of assisting you in these two areas of business so please let me know if we can be of help. Now to our topic!

The beginnings of a new business can be exciting but also stressful. Although near and dear to my heart, accounting and taxes are generally not on the forefront of a business owner’s mind with all the other issues to work out. One of the many tax related issues that will present itself however is the concept of “start-up costs.” Start-up costs are expenses that happen before you launch and start bringing in any revenue. For example, many new companies incur expenses for legal work, logo design, brochures, location site selection and improvements, and other expenses. Costs of starting a business can be separated into two time periods:

• costs for investigating and
• costs of start-up.

The tax treatment of start-up costs is not complex generally, but just foreign to most people. Before starting a business, everyone should determine the amount of capital they need up front. The IRS is generous with how those initial cost are treated for tax purposes. The treatment of start-up costs is governed by an “election” that doesn’t require any actual activity. That’s because to make this election you do nothing. By doing nothing, you can deduct the first $5,000 of start-up costs. These cost are reduced dollar for dollar by any amount over $50,000. In other words, if you pay $55,000 of start-up costs, you cannot immediately deduct them. Fortunately, this election allows you to amortize (the IRS word for deduct) any excess over a 15-year period. For example, if your start-up costs are $75,000, you could deduct $5,000 a year for 15 years.

Well if that’s what you get by doing nothing, what’s the other option?

You can elect out of the election with a statement on your first return, and never deduct these costs, until you dispose of your business. Clearly some planning should go into this before you do such a thing.

The tax treatment may be easy, but the hard part is figuring out what constitutes start-up costs. To oversimplify, it comes down to two factors:

1. When were the costs incurred
2. Whether or not the expenditures are specifically excluded from being start-up costs

Translation, what is not a startup cost is more specifically defined. Start-up costs do not include, no matter when incurred, the following:

• Costs that are otherwise capitalizable(an asset you deduct over a period of years), such as;
• Fixed assets
• Intangibles
• Organizational costs
• Syndication costs
• Costs that are otherwise not deductible

Or to simplify:

• Costs to qualify to get into that type of business (for example, getting a real estate license {deductible but not as a start-up cost}).
• Costs of buying business assets (like a building, equipment, or vehicles). These costs are considered separately for tax purposes as well.

Finally, to be subject to the rules of start-up costs the expense must take place prior to the day on which the business begins. Identifying that date is what is important as to how you handle the expenses you incur. Let me know if you any further questions!