Maximize start-up deductions for a new businesswritten by Cara Stewart

Starting a new business venture can prove exciting, but rather costly. There are certain tax advantages that can help alleviate some of the financial burden associated with entrepreneurship.

Start-up costs are those incurred in investigating or creating an active trade or business before the day on which the active trade or business begins. Further, expenses paid or incurred before a business commences operations are start-up costs. Such costs do not include interest, taxes or research, nor do they include experimental expenditures. In addition, the cost must be one that would have been deductible if incurred in connection with an existing business in the same field.

Eligible start-up costs fall within three categories: investigatory, business start-up, and pre-opening costs.

Start-up expenses include:

  • Advertising costs
  • Training costs
  • Travel expenses incurred in lining up distributors, suppliers, or customers
  • Fees incurred for executives, consultants, and similar professional services

Start-up expenses do not include:

  • Acquisition costs
  • Amounts paid for the purchase of property
  • Organizational costs
  • Deductible ordinary and necessary business expenses paid or incurred in connection with an expansion of a business.

You may assume that all of these start-up expenses are deductible as business expenses in the year you pay them, but that is not the case. Such expenses are not considered to be business expenses because they are not incurred in a going business. Instead they must be capitalized unless special rules apply.

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The American Jobs Creation Act of 2004 has changed the treatment of start-up costs in a way that favors small businesses. A taxpayer may elect to deduct up to $5,000 of start-up expenditures in the tax year that the trade or business begins. The catch, however, is that the $5,000 amount must be reduced by the amount of start-up expenditures that exceed $50,000. If an election is made, start-up expenses that are not deductible in the year that the trade or business begins, as a result of the phase-out, must be ratably amortized over 180 months (15 years) beginning in the month that the trade or business begins.

Partnerships and corporations are deemed to have made an election to deduct start-up expenditures for the tax year in which the business begins an active trade or business. Such business entities may choose to forgo the deemed election by affirmatively electing to capitalize its start-up expenditures on a timely filed federal income tax return for the tax year in which an active trade or business begins.

To ensure you are maximizing the start-up related deduction for a new business, it is important to consider each cost incurred. If you would like assistance in determining the costs that qualify for this deduction, please call our office 417-881-0145.