Business Startup Costs

Cindy Yu, CPA  https://cindiellc.com/blog/

Many people start a new business and don’t know what to do with the various costs building up over time. Business start-up costs are amounts the business paid or incurred for creating an active trade or business, or investigating the creation or acquisition of an active trade or business.

Basically, owners should treat all eligible costs incurred before beginning to operate the business as capital expenditures. Generally, the business can recover costs for assets through depreciation deductions. What are the deductible startup business expenses? How businesses can recover startup costs from their taxes? 

The business can deduct a limited amount of start-up and organizational costs. They can amortize the costs they cannot deduct currently over a 180-month period. This recovery period starts with the month the business begins to operate active trade or as a business.

Qualifying startup costs have the following characteristics

  1. Restriction:  costs in the same field as the one the business entered into
  2. Timing: costs paid or incurred before the day their active trade or business begins
  3. Amount: Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit, and to produce income in an active trade or business, such as: 
  • An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
  • Advertisements for the opening of the business.
  • Salaries and wages for employees who are being trained and their instructors.
  • Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
  • Salaries and fees for executives and consultants, or for similar professional services.
  1. Nonqualifying costs: Deductible interest, taxes, or research and experimental costs.
  2. Special Costs of purchasing an active trade or business: Start-up costs for purchasing an active trade or business include only investigative costs incurred during a general search for or preliminary investigation of the business. These are costs that help in deciding whether to purchase a business. Costs incurred to purchase a specific business are capital expenses that can’t be depreciated as the costs that meet the above 4 characteristics.