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Move now to deduct business start-up costs

by on
in Small Business Tax

With the economy awakening from its hibernation, you may be shaking the dust off business expansion plans.

If those plans include launching an entirely new business, you'll like-ly incur out-of-pocket expenses before the operation is up and running.

Advice: Grab the biggest and fastest deduction for those start-up costs by sealing the deal as soon as possible.

If you're just getting organized, you can usually choose to amortize start-up expenses over a five-year period. But once your business is officially operating, most of your "ordinary and necessary" expenses will be deductible in that tax year. So the faster you meet all the formalities, the better off you are tax-wise.

The danger: If you don't act in a timely fashion, you may not earn any tax benefit from your start-up costs. Here's the whole story:

Typical path: Amortize over 5 years

If you incur start-up costs before the business officially opens, you can elect to amortize those costs over five years, starting with the month the business begins.

You must make the choice to amortize those costs by filing a statement with the tax return for the first year the business begins.

Logistics: Fill out Part VI of Form 4562 (Depreciation and Amortization) and attach a separate statement with details on the start-up costs. The same basic rules apply if you're acquiring an existing business.

In general, four types of start-up costs are eligible for the five-year write-off:

1. Ordinary and necessary costs of investigating the business (e.g., conducting surveys and studies).

2. Pre-production expenses, such as advertising, salaries and wages paid to train employees.

3. Consulting fees and other professional services.

4. Travel costs to visit distributors, suppliers, vendors, clients, etc.

Missing deadline can be costly

 

If you plan to amortize start-up costs, make sure you do so in that first year the business begins.

Reason: If you don't make the election in the first year, you must capitalize all those start-up costs. That means you won't earn any tax benefit from the costs until you sell the business—if ever.

Even worse: Expenses you incur trying to decide whether you should launch any sort of business (before you focus on a specific venture) are considered personal expenses and, therefore, completely nondeductible.

This includes expenditures for trips to evaluate potential business oppor-tunities.

Bottom line: All these hurdles provide incentive to get your new venture operating as soon as possible. That way, your ordinary expenses will be currently deductible after that point—no waiting for five years.

What if your new business fails? If your new venture goes under, you can claim a tax loss for any remaining unamortized start-up expenses, as long as you've satisfied all the law's technicalities.

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