My wife and I are in the process of starting our own consulting business. What is the appropriate tax treatment for the expenses that we incur to start the business?
Expenses that you incur from the genesis of your business until you begin operations are considered start-up costs. This is typically the planning stage of your business, prior to any revenue actually coming in the door. (A clear example might be a retail store. You are probably an active trade or business on the day customers can come through your store front.) These costs incurred to create a trade or business and might include the following:
• Investigating the market and potential customers
• Purchase of supplies
• Advisory fees, including costs to develop the business plan
• Graphic design and office supplies
Additionally, new found businesses incur organizational costs. These typically include the following:
• Legal fees incurred to incorporate
• Business filing fees
• Franchise acquisition
• State incorporation fees
• Accounting fees
Business start-up costs incurred prior to the commencement of business operations (when you are active with the market) and organization costs are generally considered capital expenditures and are as amortized over a period of 180 months. However, you can write-off up to $5,000 of start-up expenses and $5,000 of organizational costs in the current year. This $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000.
Obviously, deducting these costs over 180 months does not provide the taxpayer with much of a current income tax benefit. As such, you may consider postponing as many of the purchases as possible until your business begins operations. Once you are an active trade or business, they are no longer considered start-up costs and you can receive the full deduction for the expense in the current year.
The author is solely responsible for the content.