If you”™ve recently started a business or are thinking about it, be aware that all eligible costs incurred before you began operating the business are treated as capital expenditures. As such, they are part of the cost basis for the business.
Generally, the business can recover costs for assets through depreciation deductions. Businesses with costs paid or incurred after Sept. 8, 2008, can deduct a limited amount of startup and organizational costs enabling business owners to recover 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.
Startup costs are the amounts that a business paid or incurred for creating an active trade or business or investigating the creation or acquisition of an active trade or business. Startup costs include amounts paid or incurred in connection with an existing activity engaged in for-profit and to produce income in anticipation of the activity becoming an active trade or business.
Examples of startup costs include amounts paid for the following:
- 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, consultants, or similar professional services.
Qualifying and Nonqualifying Costs
A startup cost is recoverable if it meets both of the following requirements:
- It”™s a cost a business could deduct if they paid or incurred it to operate an existing active trade or business in the same field as the one entered into by the business.
- It”™s a cost a business pays or incurs before the day their active trade or business begins.
Startup costs don”™t include deductible interest, taxes, or research and experimental costs.
Recoverable startup 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 considered capital expenses and cannot be amortized.
If you completely dispose of your business before the end of the amortization period, you can deduct any remaining deferred costs. However, you can deduct these deferred costs only to the extent they qualify as a loss from a business.
This column is intended as general information only; consult a tax professional for specific financial questions.
Norman G. Grill, CPA is managing partner of Grill & Partners LLC, certified public accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien.
