Writing Off Your Business Start-Up ExpensesBack to all blogs
- $5,000 First-year Start-up and Organizational Expense Write-off
- Timely Filing Requirements
- Qualifying Start-up Expenses
- Trade or Business Purchase
- Qualifying Organizational Expenses
- Expense Write-off Limitations
- How to Make the Election
- Other Considerations
Generally, start-up expenses include all expenses incurred to investigate the formation or acquisition of a business or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the election, an expense must also be one that would be deductible if it were incurred after the business actually began. An example of a start-up expense is the cost of analyzing the potential market for a new product.
- Qualifying Start-Up Costs – A qualifying start-up cost is one that would be deductible if it were paid or incurred to operate an existing active business in the same field as the new business, and the cost is paid or incurred before the day the active trade or business begins. Not includible are taxes, interest, and research and experimental costs. Examples of qualified start-up costs include:
o Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc.;
o Wages paid to employees and their instructors while they are being trained;
o Advertisements related to opening the business;
o Fees and salaries paid to consultants or others for professional services; and
o Travel and other related costs to secure prospective customers, distributors, and suppliers. For the purchase of an active trade or business, only investigative costs incurred while conducting a general search for, or preliminary investigation of, the business (i.e., costs that help the taxpayer decide whether to purchase a new business and which one to purchase) are qualified start-up costs. Costs incurred attempting to buy a specific business are capital expenses that aren’t treated as start-up costs.
- Qualifying Organizational Cost - include fees for legal services, such as for drafting LLC documents, partnership agreements, corporate charter and by-laws; incorporation fees; temporary directors' fees; and organizational meeting costs.
The election to deduct start-up and organizational costs is made by claiming the deduction on the return for the year in which the active trade or business begins, and the return must be filed by the extended due date.
The decision to write off these expenses should take into consideration other tax benefits available in the first of year of the business, including bonus deprecation and Sec 179 expensing, and the overall result in the first year of the business. If you are starting a business, it may be appropriate to formulate a business plan in advance. If you have questions or would like an appointment to discuss how to establish your business and the types of business structures that are available, please give this office a call.