You may understand the rules about writing off ongoing business expenses or some of the major expenses you rack up in your first year as a business, but what about those costs that accrue before you make it official and actually open your doors? How do you attack those from a tax standpoint?
Luckily many of those pre-business expenses can be written off after you start your business. The rules surrounding these deductions, however, differ slightly from your typical business write offs. Congress has a cap on the amount of the startup costs that can be claimed as a deduction. If the expenses are $50,000 or less, you can elect to deduct up to $5,000 in the first year, plus you can amortize the balance over 15 years. If your expenses exceed $50,000, then your write off gets reduced one dollar for every dollar in excess of $50,000. For example, if your expenses are $53,000, then you would only be allowed to write off $2,000 in your first-year write off.
The minute you start spending any kind of money on your upcoming venture is when you should start keeping track of those expenses. Startup expenses typically include all of the costs that come from investigating the formation or acquisition of a business or engaging in the for-profit activity in anticipation of that activity becoming a business. For your expenses to be eligible, they must be expenses that would also be considered deductible if they were incurred once the business actually began. Here are some examples of expenses that would qualify.
(Note: Expenses that don't qualify include taxes, interest or experimental costs.)
The write off is actually made by claiming the deduction on your return for the year in which the business began.
If you are purchasing an active business, the costs associated with helping you decide which one to purchase and whether or not to purchase it can also be considered startup expenses. The costs incurred when you actually attempt to buy the business, however, are capital expenses and can't be treated as startup expenses.
