Launching a new business takes hard work — and money. Costs for market surveys, travel to line up potential distributors and suppliers, advertising, hiring employees, training, and other expenses incurred before a business is officially launched can add up to a substantial amount.
The tax law places certain limitations on tax deductions for start-up expenses.
- No deduction is available until the business becomes active.
- Up to $5,000 of accumulated start-up expenses may be deducted in the tax year in which the active business begins. This $5,000 limit is reduced (but not below zero) by the excess of total start-up costs over $50,000.
- Any remaining start-up expenses may be deducted ratably over the 180-month period beginning with the month in which the active business begins.
Example. Gina spent $20,000 on start-up costs before her new business began on July 1, 2015. In 2015, she may deduct $5,000 and the portion of the remaining $15,000 allocable to July through December of 2015 ($15,000/180 × 6 = $500), a total of $5,500. The remaining $14,500 may be deducted ratably over the remaining 174 months.
Instead of deducting start-up costs, a business may elect to capitalize them (treat them as an asset on the balance sheet). Deductions for “organization expenses” — such as legal and accounting fees for services related to forming a corporation or partnership — are subject to similar rules.
If you want to be more aggressive lowering your tax obligations but stay within the legal limits, call 949-759-5626 and ask for Jerry Morey.
Morey & Associates is a Southern California CPA Accounting Firm with offices in Newport Beach and San Clemente CA. Our clients are located throughout Los Angeles and Orange County.