Before your business opened, I am sure that you spent money on the business. That may have been when you spent the most money. And that spending may have spanned one or more year before your first year in business. How do you handle those expenses? First, don’t worry; you haven’t lost them they just get special treatment, at least for taxes.
What I’m talking about are two sets of special costs. The first set is organizational costs. These are what you spent to get all the paperwork for your partnership or corporation prepared and filed. They can include attorney and accountant fees, costs to file your state registrations, travel to meetings and many others. The second set of special costs are called start-up costs and these can include money spent to create or investigate creating the business. Location surveys, legal costs for vendor contracts, advertising, pre-opening utilities, or pre-opening travel are a few of the costs that you might see as start-up. However, don’t include assets which need to be depreciated as start ups.
Generally, start-up and organizational costs must be amortized over 15 years. Amortization is a type of depreciation where a non-tangible asset is deducted evenly over a time period. But, the IRS allows a limited deduction of the costs in the first year of operation. Currently, a business can deduct up to $10,000 in start up costs and up to $5,000 in organizational cost in the first year. The remaining costs are then amortized over 15 years. There is a phase out and an election statement must be included in there is any amortization, so check with your tax professional. If the business closes before the 15 years of amortization are over, the remaining amortization is taken on the final return.
By the way, if you spend money looking at a business but never seriously try to open or acquire the business, that money is considered a personal loss and not deductible. If you do acquire the business or do attempt to open the business, the expenses may qualify a capital expenses.
Starting a business can take years and you can have expenses long before you open the doors. Keep records of those expenses. You won’t be able to deduct them as you go, but once you open, they become a tax deduction.