Starting a Business – Maximize Benefits of Start-Up Costs

Planning to get the most out of any new business venture begins with making sure you get the greatest possible tax advantages for your investigation costs, start-up expenses, and other organization costs. These include costs such as advertising, salaries and wages of employees-in-training, travel and other expenses of lining up customers, suppliers, and distributors, and fees paid for consultants and professional services.

You may assume that all of these start-up expenses are deductible as business expenses in the year you pay them, but that is not the case. Such expenses are not considered to be business expenses because they are not incurred in a going business. Instead they must be capitalized unless special rules apply.

For the 2010 tax year only, you may immediately deduct up to $10,000 of qualified trade or business start-up expenses. Congress temporarily increased the deduction for start-up expenses in the Small Business Jobs act of 2010 (H.R. 5297). For 2010, the $10,000 deduction is reduced by the amount’s your total start-up costs that exceed $60,000. After 2010, however, the amounts revert to a $5,000 deduction and a $50,000 phaseout threshold. The increase in the deduction amount is intended to allow entrepreneurs to recover more small business start-up expenses upfront, increasing cash flow and the ability to hire more workers.

Thus, you may elect to deduct up to $10,000 ($5,000 after December 31, 2010) of start-up expenditures in the tax year that the trade or business begins. The catch, however, is that the $10,000 ($5,000 after December 31, 2010) amount must be reduced by the amount of start-up expenditures that exceed $60,000 ($50,000 after December 31, 2010). If an election is made, start-up expenses that are not deductible in the year that the trade-or business begins as a result of the phase-out must be ratably amortized over 180 months (15-years) beginning in the month that the trade or business begins.

Another complication with start-up expenses is that they are amortizable only by the person who incurs them. If your new business is going to be a sole proprietorship, that won’t be a problem. However, if the venture is to be a corporation, you can’t personally deduct the costs you incur before incorporation. Those costs are part of your investment in the corporation’s stock; you may want to contribute the funds to the corporation and let the corporation incur the expenses so that it can amortize them.

It’s also important to know that some expenses are treated more favorably than the regular start-up costs we have been talking about, and some less favorably. Start-up expenses for interest, taxes, and research costs usually can be deducted in the year paid. The cost of tangible property purchased for use in the business can be recovered by way of accelerated depreciation deductions over various periods, depending upon the type of asset, but generally faster than if considered under the general start-up cost umbrella.

You want to be sure that you get whatever tax benefit you can from all of these expenses. To do so, you need to coordinate the expenses with the business’s starting date, and properly make the necessary elections. If you are expanding an existing business, rather than starting a new one, you may be able to deduct the expansion costs currently. We would be glad to help you explore these possibilities further to be sure that you avoid any costly pitfalls. Please do not hesitate to call our offices if you need any assistance in planning your business start-up.

Reproduced with permission from CCH’s Client Letter, published and copyrighted by CCH Incorporated, 2700 Lake Cook Road, Riverwoods, IL 60015.

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