Writing Off Your Business Start-Up Expenses

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New Tax Provision For Start-Up Businesses

Many small to mid-sized firms have gone out of business as a result of the Covid-19 Pandemic. However, due to the success of coronavirus vaccines, the economy is approaching normalcy, giving new businesses the opportunity to open. A new tax provision is allowing new business owners to deduct up to $5,000 of their start-up costs and $5,000 of organizational expenses during their first year of operation. The expenses that aren't deductible in the first year of business must be amortized over a span of 15 years. The start-up costs must be capitalized if a taxpayer who acquired them does not make the election. This means that only upon the termination of the business can these expenses be recovered. 

What's Considered A Start-Up Business Expense?

Start-up expenses include all expenses obtained in order to investigate the formation of a business. They also include expenses incurred during the participation of a for-profit activity in anticipation of it becoming an open business. Eligibility is determined by whether or not the expense would be deductible if it were obtained after the business began. A good example of start-up costs are funds applied towards market research or business consulting.

A good example of start-up costs are funds applied towards market research or business consulting.

Qualifying Start-Up Costs

A qualifying start-up cost is one that would be deductible if it were paid or incurred to operate an existing active business in the same field as the new business, and the cost is paid or incurred before the day the active trade or business begins. Not includible are taxes, interest, and research and experimental costs. Examples of qualified start-up costs include:

  • Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc.;
  • Wages paid to employees and their instructors while they are being trained;
  • Advertisements related to opening the business;
  • Fees and salaries paid to consultants or others for professional services; and
  • Travel and other related costs to secure prospective customers, distributors, and suppliers.

A new tax provision is allowing new business owners to deduct up to $5,000 of their start-up costs and $5,000 of organizational expenses during their first year of operation.


For the purchase of an active trade or business, only investigative costs incurred while conducting a general search for, or preliminary investigation of, the business (i.e., costs that help the taxpayer decide whether to purchase a new business and which one to purchase) are qualified start-up costs. Costs incurred attempting to buy a specific business are capital expenses that aren’t treated as start-up costs.

Qualifying Organizational Cost

This includes fees for legal services, such as for drafting LLC documents, partnership agreements, corporate charter and by-laws; incorporation fees; temporary directors' fees; and organizational meeting costs.

Phaseout

As with most tax benefits, there is always a catch. Congress put a cap on the amount of expenses that can be claimed as a deduction under this special election. Here’s how to determine the 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 180 months. 

Example: Eligible start-up expenses are $6,000 and the business began on July 1, 2022. On the business’s 2022 tax return, the deduction for start-up expenses will be $5,033 ($5,000 + ($1,000/180 x 6 months)).

If the expenses are more than $50,000, then the $5,000 first-year write-off is reduced dollar-for-dollar for every dollar in start-up expenses that exceeds $50,000. 

For example, if start-up costs were $54,000, the first-year write-off would be limited to $1,000 ($5,000 – ($54,000 – $50,000)), plus the remaining $53,000 of costs would be amortizable over 180 months. These limits are applied separately for the start-up and organizational costs. 

The election to deduct start-up and organizational costs is made by claiming the deduction on the return for the year in which the active trade or business begins, and the return must be filed by the extended due date. 

The decision to write off these expenses should take into consideration other tax benefits available in the first of year of the business, including bonus deprecation and Sec 179 expensing, the Sec 199A deduction, and the overall result in the first year of the business. 

If you are starting a business, it may be appropriate to formulate a business plan in advance. If you have questions or would like an appointment to discuss how to establish your business and the types of business structures that are available, please give this office a call.   


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