If you’ve recently started a business, or are in the process of starting one now, it’s important to think about taxes.
The way you handle some of your startup 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. But startup expenses are another story.
Write Off Startup Expenses
Some business startup costs can be deducted in your first year of business, while most must be spread out over several years.
Corporations or partnerships are permitted to write off $5,000 of startup expenses in the year business begins.
Startup costs not written off are then deducted over a period of 180 months, beginning with the month business begins operations.
Startup expenses can include:
- Investigating the creation or acquisition of a business
- Creating the business
- Engaging 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.
Startup Expense Example
An example of a startup expense is the cost of analyzing the potential market for a new product.
If the business is 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 startup and organization expenses to ensure you receive favorable tax treatment.
Debra Annis brings 40+ years of experience in accounting and tax. She helps clients overcome obstacles with cash flow, planning, stability and growth. She enjoys working with clients to find solutions that achieve their plans and avoid paying unnecessary tax. Reach her at 314-961-1600.
About Smith Patrick CPA
Smith Patrick CPA is a St. Louis-based, family-owned CPA firm dedicated to providing personal guidance on taxes, investment advising and financial services to small businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to businesses, non-profits, individuals and government agencies in St. Louis and the surrounding areas. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.