Business incurs expenses before you technically “open for business.” When forming and operating a startup, entrepreneurs face some critical tax issues. By paying attention to these issues, startups can position themselves to take advantage of some meaningful tax benefits and avoid tax problems. If you’re launching a business, you’ll want to start things properly and orderly. Small business owners face a difficult decision during the initial stages of setting up an enterprise. Start-up costs can easily turn into sunk costs unless they are included in the correct place on the business’s tax forms.
Start-up business costs are different than normal operating costs, and they must be filed under the correct section of the tax code. It takes time to learn how to categorize various expenses and capital expenditures accurately. Startup costs can be anything from market research and analysis to scouting out locations for your business. They can include the costs of training staff, legal fees and establishing vendors and suppliers.
Most of your startup expenses are treated as capital costs for tax purposes. The IRS considers them long-term assets when investing in the future of your business. The founders of a company must initially determine whether to organize the company as a limited liability company (LLC) or a corporation. If formed as a corporation, the company must also determine whether to file an election to have it taxed as an “S corporation” rather than a “C corporation.”
S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their stockholders for tax purposes. Stockholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates (so-called “flow-through taxation”). This allows S corporations to generally avoid double taxation on the corporate income.
Here are some examples of start-up costs that can be deducted:
* Qualified property is subject to the rules of depreciation, which allows the business to deduct the costs of business property over a period of multiple years. The exact amount of time this yearly deduction will go into effect depends on the method of amortization. Although business owners can make this decision independently, our qualified tax accountants can provide valuable insights regarding the benefits and drawbacks of each method.
* Costs associated with market research and product analysis qualify for this tax deduction.
* Costs associated with researching the business site’s potential location qualify for this tax deduction.
Other deductions are available to business start-ups, but certain conditions may apply. For example, one popular deduction for start-up businesses is only available if the total costs of starting the business are less than $50,000. In this case, the total deduction available is $5,000, so it can be applied as long as the total amount is $55,000 or less. At this point, none of the deduction is available. For example, if the total amount of the start-up costs are $52,000, the business will qualify for a $3,000 deduction. Consult with a professional accountant or tax advisor before doing anything.