Many people don’t think about start-up expenses as potentially deductible. Others think they are deductible just like day to day business operating expenses.
Start-up expenses can be thought of as “thinking about getting into business expenses” and your “getting your business started expenses.”
A key concept is that you must be ‘open for business’ to deduct your ordinary and necessary business expenses. When are you considered open for business?
When the Open Sign is out and customers can come in. When your website is up and running, surfers can find you and can buy from you and you can deliver. When you are ready, willing and able to transact business, sell products and services.
What about pre-opening expenses? Before I opened I…
• Traveled to meet with and learn from others in the business
• Went to lunch, dinner, movies, and played golf with friends and business people to research the viability of the business concept
• Took classes to learn about the business
• Spent money analyzing the market
• Bought books and magazines to find information about the market
• Used my car to make prospecting and other calls to get started
• Advertising for the opening of the new business
• Paid salaries and wages for employees I had to train
• Travel and other costs for securing prospective distributors, suppliers or customers
• Fees for lawyers, accountants, and consultants
Good news, these expenses usually qualify as start-up expenses. In the tax law there is a provision to deduct these expenses. Under old, old law you had to amortize these over 60 months. Then lawmakers gave us a special $5,000 write-off that taxpayers had to know to make a special election on their tax return for. Then they took away the requirement to have to make a special election, we could just write them off on our taxes.
With a 2010 tax change we can now write off up to $10,000 of start-up costs on our tax returns. If your expenses are more than the $10,000, the balance can be written off over 180 months. If your start-up costs are more than $60,000, the $10,000 deduction is reduced dollar for dollar until it’s zero. That is, if your start-up costs were $66,000 you’d only get to deduct $4,000 the first year and amortize the balance of $62,000 over 180 months.
A word of caution here. If you do not qualify to be in business or the law prohibits you from starting the business, you are not in business. A suspended insurance broker could not deduct his expenses. Also the expenses you are trying to deduct cannot qualify you to start your business as a minimum requirement to enter the field.
Example: Mr. Duecaster, a high school teacher, tried to deduct his law school tuition and other costs as start-up expenses for his law practice. Wrong! The court ruled that he gets no deduction for the educational expenses because the education was necessary to qualify him to practice law, not start a business. The law school expenses were personal.
That being said, there have been cases where graduate school expenses were deemed deductible. Advanced stuff so if you think it applies, get professional assistance.
For a handy little handout on start a business, click here: Starting a Business
This can get a bit tricky, so don’t hesitate to call me when thinking about starting a business.