Expenses incurred in starting a business are treated as capital expenses and are a part of your basis in the business. As a result, you generally cannot recover these expenses until you sell or close the business. However, under a special provision, you are deemed to elect to deduct up to $5,000 of start-up expenditures in the tax year in which you begin your trade or business (the $5,000 amount is reduced by the amount by which the cumulative cost of start-up expenditures exceeds $50,000). Start-up expenditures that are not deductible in the year in which the trade or business begins are amortized over a 15-year period. If and when the business is liquidated and dissolved, the unamortized portion of the expenditures may be deducted in full.
There are three types of start-up expenses that you can amortize: (1) expenses incurred in investigating the creation or acquisition of a business; (2) expenses incurred in connection with creating a business; and (3) expenses incurred in connection with an activity engaged in for profit and for the production of income before business begins, in anticipation of the activity becoming an active business. These expenses can be deducted only once business operations have commenced.
For example, if you are starting a landscaping and nursery business, your start-up expenses may include the cost of items such as the following: an analysis of the need for a landscaping company in a particular area; securing prospective seed and plant suppliers; locating land for the nursery (but not any fees incurred in acquiring the land); advertisements announcing the opening of the business; business licenses; certain professional services (for example, an accountant’s fees for setting up a bookkeeping system).
If you have questions regarding start-up expenses for a particular business, contact us to set up a consultation with an accounting specialist.
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