Randy J. Elder, CPA, P.C.

Starting a new business? What you need to know about writing off your startup expenses

As a CPA specializing in helping small businesses in the Phoenix area, I often get questions about deducting startup expenses. The good news is that the tax code does allow up to $5000 of qualifying startup costs to be written off during the first year of operation. However, like most aspects of the tax code, there are some stipulations, and it can get complicated. Below you’ll find the most costs information needed to help answer some of the more common questions.

Small business tax deductions

If you started a business in 2014 or will do so in 2015, you should know that you may deduct up to $5000 of qualifying start-up expenses in the first year of operation. The alternative is to amortize the costs over 15 years.

So what constitutes a qualified startup expense? In general:
* Any cost incurred to investigate the formation or acquisition of a business
* Expenses incurred by engaging in a for profit activity with the expectation that the activity will become an active business
Note: The expense must be one that would be deductible if it were incurred once the firm began operating.

Few examples of qualified startup expenses

• The cost of analyzing the potential market for a new product
• Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc.
• Wages paid to employees and their instructors while the employees take the training.
• Advertisements related to opening the business
• Fees and salaries paid to consultants or others for professional services
• Travel and other related costs to secure prospective customers, distributors, and suppliers

If you are planning to purchase an existing business, only the expenses incurred while conducting a general search to help you decide whether to buy a business and which one to purchase quality for the deduction. Costs incurred in the process of actually buying a specific business are capital expenses and do not qualify for the startup deduction.

So far, it is pretty straight forward but of course, there is always a catch and that is where it can become complicated. There is a cap on the amount of the start-up expenses that can be claimed as a deduction. If the qualified startup expenses are $50,000 or less, you can deduct up to $5,000 in the first year. And, you are allowed to amortize the balance over 180 months. However, if the expenses are more than $50,000, then the $5,000 first-year write-off is reduced dollar-for-dollar for every dollar start-up costs exceed $50,000. As I said, it can get complicated. Here is an example to help simplify the calculation. Assume your start-up costs were $54,000. Your first-year write-off would be limited to $1,000 ($5,000 – ($54,000 – $50,000)).

OK, so let’s assume you started a business in 2014 and incurred qualifying startup expenses. You will claim the deduction on your tax return for this year. Use IRS Schedule C, Profit or Loss from Business (Sole Proprietorship). The deduction is taken as part of the “Other Expenses” in Part V. If your startup costs exceeded $50,000 you will use Form 4562 to amortize the excess amount over 180 months, beginning with the month that you start operating the business.

If you have any questions related to the start-up expenses election and whether it will benefit your business, please give me a call.