The expense of starting a new business can be daunting. To help offset some of those costs, the IRS allows new businesses — partnerships and incorporated companies alike — to take deductions against their income tax obligations. How can you claim these deductions? And what should you know about them? Here's a short guide to deductible start-up expenses.
What is a Start-Up Expense?
There are basically two categories of what is generally considered 'start-up expenses'. The first, applicable to both partnerships and corporations, is actually organizational expenses. These are the costs of actually starting the partnership or corporation. They may include things like fees for incorporation or filing, legal costs to create a partnership agreement or corporate charter, and the costs of temporary directors.
The second type of 'start-up' expense is actually the cost of starting up your operations. Whereas organizational expenses focus on the creation of the company itself, start-up expenses involve getting it off the ground. Start-up expenses could include research into your market, training employees, lining up vendors or business partners, or advertising your grand opening.
Not all of the costs involved in setting up a business qualify for a deduction, though. If you issue stock as a corporation, the cost of doing so is generally not considered a "start-up" or organizational expense. Similarly, the cost of seeking out partners for a partnership is not deductible. Fees to lease a building would similarly not be part of this category.
How Do You Amortize Start-Up Expenses?
So, if you have start-up or organizational expenses, how do you properly deduct them? Generally, for both partnerships and corporations, you can immediately deduct the first $5,000 of the qualifying costs. This gives your new business a quick boost in deductions. The remaining costs should be added up and divided by at least 180 months (15 years). This is the standard amortization (similar to depreciation) period.
What is the benefit of taking expense deductions for such a long period rather than all at once? Most businesses start out making little or no actual profit for one or more years. If this is the case for you, the company would lose out if it had to take deductions when there is little or no income to be taxed. By amortizing these expenses, your business gets a deduction in future years when it is making more money.
Want to know more about deductible start-up and organizational costs? Work with an experienced accountant as early as possible. Their expertise will be invaluable in making the most of your early years and setting up your business for a profitable future.
For more information on new business tax deductions, consult an accountant specializing in business accounting in your area.
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