By John Stylianou, Accountant
According to the tax law, you are allowed to take a tax deduction for ordinary and necessary business expenses if you are engaged in a trade or business. What about the expenses involved in investigating the potential for a new business?
The tax law calls these expenses “start-up costs” and says they are not deductible prior to the start of a business. In fact, if your investigation does not lead to actually starting a business, these costs may never be deductible. If your investigation leads to actually starting a business, you may elect to amortize (write off) these startup costs over a period of at least 60 months, beginning with the month the business started.
Startup costs are those expenses that would have been deductible if incurred by an operating business. Typical startup expenses include market research costs, site selection, advertising, consultant’s fees, and necessary travel before the business actually started.
Interest, taxes, and research and development costs incurred during a startup period need not be amortized; they may be deducted when incurred or paid.
Startup costs that must be amortized also do not include costs attributable to the acquisition of depreciable property. You may find it advantageous to identify those startup costs connected with the acquisition of specific assets in order to obtain faster write-offs.
To amortize startup costs, you must make an election to do so on the tax return for the year in which the business actually started.
Seek advice prior to incurring any expenses for starting or acquiring a business. Failure to heed the tax rules in this area could be a costly mistake.
For assistance, give us a call.