How? Claim an instant write-off for part or all of your qualified start-up expenses. That sweet tax break—courtesy of a two-year-old tax law—applies to expenses you paid or incurred after Oct. 22, 2004.
Here’s the story: Prior to the tax-law change, you had to amortize start-up expenses over 60 months, beginning with the month the business began.
Start-up costs include investigatory expenses (e.g., surveys, studies); pre-production expenses, such as advertising and wages to train employees; consulting fees and other professional services; and travel costs to meet with suppliers, vendors and clients.
To take an instant deduction for start-up costs, you must make a special election by the tax-return due date. If you miss the deadline, you’ll have to capitalize those start-up costs, meaning you won’t gain any tax benefit from the start-up costs until you sell the business, if ever.
The logistics: Fill out Part VI of Form 4562 (Depreciation and Amortization) and attach a separate statement with the details about your start-up expenses. The same basic rules apply if you incur start-up expenses to acquire an existing business. The statement must include:
• The number of months (not less than 180) over which you’ll amortize the expenses.
• A description of each start-up expense.
• The month in which the active business began or was acquired.
A description of the business.
The 2004 law lets you take a first-year deduction of up to $5,000 of qualified start-up expenses. You must amortize any remainder over 180 months.
The bad news: If your start-up expenses exceed $50,000, you must reduce that $5,000 write-off on a dollar-for-dollar basis.
Example: Let’s say you started a new spin-off venture last year and incurred $30,000 in start-up expenses on June 1 and $22,000 of expenses on Dec. 1. Since your total start-up costs exceeded $50,000, the maximum first-year write-off you can claim is limited to $3,000 ($5,000 minus the difference between $52,000 and $50,000). You then amortize the remaining $40,000 of start-up costs over 180 months.