If you’ve recently started a business, or are in the process of starting one now, you should be aware that the way you treat some of your initial expenses for tax purposes can make a big difference in your tax bill.
Generally, expenses incurred before a business begins don’t generate any deductions or other current tax benefits. However, corporations or partnerships are permitted to write off $5,000 of “start-up expenses” in the year business begins. Costs not written off are deducted over a period of 180 months that begins with the month business starts operations.
Start-up expenses include, with a few exceptions, all expenses incurred to investigate the creation or acquisition of a business, to create the business, or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the election, an expense also must be one that would be deductible if it were incurred after the business began. An example of a start-up expense is the cost of analyzing the potential market for a new product.
If the business in unsuccessful in obtaining the requisite licensing or decides to abandon the new business prior to beginning operations, a corporation may deduct the expenses as a business loss in the year of abandonment.
As you can see, it’s important to keep a record of these start-up and organization expenses to ensure you receive favorable tax treatment.