Business Start-Up Costs - By: StrataTax

Business owners may have the opportunity to ease their financial burden of starting a new business by deducting a limited amount of start-up costs. For tax purposes, start-up costs are amounts paid or incurred for either creating or investigating the creation or acquisition of an active trade or business. This includes amounts paid to or incurred in connection with an existing activity engaged in for profit, as well as the production of income in anticipation of the activity becoming an active trade or business.

Business start-up costs are generally capital expenditures, although you can elect to deduct up to $5,000 of start-up costs paid or incurred after October 22, 2004. This $5,000 deduction is reduced by the amount your total start-up costs exceed $50,000. Any remaining amount must be amortized. Elect to choose this deduction by claiming the deduction on the income tax return (filed by the due date including extensions) for the tax year in which the activity or trade begins. If needed, you may make the election by filing an amended return within 6 months of the due date of the return (excluding extensions).

Qualifying Costs. In order to qualify as amortizable, a start-up cost must be a cost you could deduct if you paid or incurred it to operate an existing active business and a cost you pay or incur before the day your active business begins.

The following are examples of business start-up costs.
An analysis or survey of potential markets, labor supply, products, etc.
Advertisements for the opening of a business
Salaries and wages for employees who are being trained and their instructors
Travel and other necessary costs for securing prospective distributors, supplies, or customers
Salaries and fees for consultants, executives, and other similar professional services.

Nonqualifying Costs. Deductible interest, taxes or research and experimental costs are nonqualifying costs.

Purchasing an Active Trade or Business. Only the investigation costs incurred in the course of a general search or preliminary investigation of the business qualify as amortizable business start-up costs. They are generally the costs that help you decide whether or not to purchase a business. Costs that you incur in an attempt to purchase a specific business are capital expenses and do not qualify as start-up costs.

Your tax preparer can provide you with more information regarding business start-up costs on your income tax return. StrataTax, a San Diego consulting and tax services firm, is available year-round to assist you with income tax preparation and tax planning. Call us at (858) 225-7720 to setup your free initial consultation or visit us at http://www.StrataTax.com for more information.

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