There are a multitude of expenses associated with starting a business. It is beneficial to be knowledgeable in how to categorize these costs as well as when to start the business. For tax, there are two categories of expenses that a person should be aware of when starting a business.
Startup Costs
Startup costs are costs incurred to investigate the potential of creating or acquiring an active business and to create an active business. Consulting fees for new business, advertising a new business, and payments to employees prior to a business opening its doors are a few examples of startup costs. As a deemed election, these costs can be expensed up to $5,000 in the year the business starts operations. The remaining costs are capitalized and amortized over 180 months starting in the month operations commence. Keep in mind that the initial $5,000 expense deduction will be reduced dollar/dollar after $50,000 of expenditure in this category. In other words, after $55,000 of startup cost expenditures, you must capitalize the full amount and amortize it over 180 months.
Organizational Costs
These costs come from legal and accounting fees for the drafting of organizational documents such as partnership agreements, corporate charters and bylaws. Other expenses include filing fees, and organizational meetings that are directly related to the business creation. For tax purposes organizational costs have the same deduction and amortization rules as startup costs.
A few planning tips are to recognize what makes up each class of expense, plan expenditures in a way to properly classify these expenses, and, if possible, to start the business before reaching the $5,000 threshold for each type of cost to maximize the deduction and reduce the amount of expenditures that are capitalized. With proper planning, a business should be able to expense up to $10,000 ($5,000 of startup and $5,000 of organizational costs) in the year the business commences.
Do you have questions about how to categorize your expenses for your family-owned business or startup? We’ve been working with closely-held businesses for more than 65 years helping them in the areas of tax, accounting and back office. Contact us today to find out how we can help you and your business grow.