Typical Startup Costs
You’re going to incur a lot of costs, known and unforeseen, when starting up your new business. Unfortunately, not all of these costs can be deducted right away. Some of them will need to be amortized and deducted over time.
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You’re going to incur a lot of costs, known and unforeseen, when starting up your new business. Unfortunately, not all of these costs can be deducted right away. Some of them will need to be amortized and deducted over time. Here are a few typical costs that you won’t be able to deduct right away.
- Costs of investigation
These are the expenses incurred to analyze potential markets, products, or labor supply. Feasibility studies or significant travel expenses may be incurred during this stage. Due diligence efforts can be expensive. For acquiring a business, these costs could also include inspection and analysis of all legal and financial information, in addition to operations, sales, or other business aspects. In some situations, it may be advisable to form a corporation prior to initiating a search to ensure a tax deduction in the event of an abandoned or unproductive investigation.
- Pre-opening expenses
These are incurred after the decision is made to create a business, and which one, but before operations begin. These costs can include salaries, training, travel, and professional fees. Costs incurred during this phase that would be an allowable deduction if paid or incurred by an existing and similar trade or business are expenditures treated as start-up expenses. Specifically excluded from the definition of start-up expenses are interest, certain taxes, and research and development expenses. These costs can be deducted during the start-up phase, consequently creating a net operating loss.
- Litigation to determine the commencement date
Determining the commencement date for when a trade or business begins often has been the subject of litigation. Each case must be considered individually on the facts and circumstances, which often results in an ambiguous answer. The consequence of misjudging this date may result in an invalid election to amortize the start-up costs and result in permanent capitalization. The type of business is a significant factor in determining a start date, as a business is considered to begin when it starts the operations for which it was organized. A manufacturing enterprise usually would begin when the production process commences. Retail operations are generally considered to begin when the doors are opened to the public. Service businesses have less precedent to follow, but what does exist indicates a service business begins when actual services are provided or the owner presents himself or herself as ready to provide services.
- Acquiring an existing business
Start-up expenses are applicable to the investigation phase only when acquiring an existing business. After the decisions are made as to whether to enter a business and which specific business to acquire, the investigation phase concludes and the acquisition process begins. Costs incurred related to this process are capitalized. Certain acquisition costs may be depreciated or amortized, depending on how the deal is structured. At the time the business is acquired, the amortization of start-up expenses can begin.
Source: Tamara Campfield is a CPA and partner with Duys & Campfield, LLC. With over 25 years in public accounting, Tamara has a broad range of experience and substantial depth of knowledge. She provides tax and accounting services to small and medium-sized businesses, entrepreneurs, professionals, farmers, non-profits, and individuals. Contact: 7535 E Hampden Ave., Suite 108, Denver, CO 80231.