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Get fast tax results for start-up costs

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in Small Business Tax,Small Business Tax Deduction Strategies

If you started a new business venture in 2013, you may be in line for a special tax break for entrepreneurs.

Strategy: Realize a fast write-off for “start-up costs.” Normally, these business-related costs must be amortized over time, but you can take a current deduction for up to $5,000 of the qualified expenses.  

However, the immediate deduction for start-up costs phases out above a $50,000 threshold.  

Here’s the whole story: An entrepreneur can qualify for a current deduction once the operation is “open for business” (i.e., it is ready to accept customers or clients). The actual event triggering eligibility for the deduction will vary according to the type of business and the relevant circumstances. For example, if you previously provided free services to friends and family, but you started to charge everyone in 2013, this may constitute the start of a business.

The list of deductible start-up expenses includes:

  • An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
  • Advertisements for the opening of the business
  • Salaries and wages for employees who are being trained and their instructors
  • Travel and other necessary costs for securing prospective distributors, suppliers or customers
  • Salaries and fees for executives and consultants or for similar professional services

Note, however, that the list does not include deductible interest, taxes or research and experimental costs. These items can be deducted before business commences. Amortizable start-up costs for purchasing an active trade or business include only those investigative costs incurred in the course of a general search for or preliminary investigation of the business. These are costs that help decide whether to acquire the business. But costs incurred in an attempt to purchase a specific business are capital expenses that can’t be amortized.

Under current law, a business owner may claim a first-year deduction of up to $5,000 of qualified start-up expenses. Any remainder can be amortized over 180 months. However, the $5,000 immediate write-off phases out on a dollar-for-dollar basis once start-up expenses exceed $50,000.

Example: Suppose you incurred $51,000 of qualified start-up expenses in 2013. As a result, the allowable deduction is reduced to $4,000 ($5,000 minus the difference between $51,000 and the $50,000 phase-out threshold).

Claim the deduction for start-up costs on your business tax return. Any remainder is amortized over 180 months with the amortization deduction claimed on Form 4562, Depreciation and Amortization.

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