How do I maximize start-up deductions for a new business?

Starting a new business venture can prove exciting, but rather costly. There are certain tax advantages that can help alleviate some of the financial burden associated with entrepreneurship. A taxpayer may start a business by forming an entirely new business or acquiring an existing business. One of the most important decisions a business owner should make is to choose a type of business entity. If the business is entirely new, the taxpayer will be able to choose the type of entity from inception; however, if the taxpayer purchases an entity that differs from the entity of choice, the taxpayer must convert the purchased entity to the entity of choice. Be aware that each type of entity—be it sole proprietorship, corporation, or partnership—comes with its own advantages and disadvantages.

Regardless of the type of business entity that a taxpayer decides on for his or her new business, a portion of the start-up costs may be deducted, with amortization available for the remainder. Start-up costs are those incurred in investigating or creating an active trade or business before the day on which the active trade or business begins. Further, expenses paid or incurred before a business commences operations are start-up costs. Such costs do not include interest, taxes or research, nor do they include experimental expenditures. In addition, the cost must be one that would have been deductible if incurred in connection with an existing business in the same field.

Eligible start-up costs fall within three categories: investigatory, business start-up, and pre-opening costs. Start-up expenses include:

  • Advertising costs;
  • Training costs;
  • Travel expenses incurred in lining up distributors, suppliers, or customers; and
  • Fees incurred for executives, consultants, and similar professional services.
Start-up expenses do not include:

  • Acquisition costs;
  • Amounts paid for the purchase of property;
  • Organizational costs; or
  • Deductible ordinary and necessary business expenses paid or incurred in connection with an expansion of a business.
A taxpayer beginning a new business can take a first-year deduction on the first $5,000 of start-up costs. The $5,000 deduction is reduced dollar-for-dollar to the extent start-up expenses exceed $50,000. Any excess amount must be amortized over a 180-month period.

Partnerships and corporations are deemed to have made an election to deduct start-up expenditures for the tax year in which the business begins an active trade or business. Such business entities may choose to forgo the deemed election by affirmatively electing to capitalize its start-up expenditures on a timely filed federal income tax return for the tax year in which an active trade or business begins.

To ensure you are maximizing the start-up related deduction for a new business, it is important to consider each cost incurred. If you would like assistance in determining the costs that qualify for the start-up cost deduction, please contact our office at your earliest convenience to arrange an appointment.