STARTING A BUSINESS - RULES AND METHODOLOGY FOR WRITING OFF COSTS OF GOING INTO BUSINESS
As a business owner, you will incur upfront expenses to start and get the operation off the ground including start-up costs such as market and product research, equipment, training, and organizational costs such as licenses, permits, entity formation.
Simply put, these expenses must meet the two criteria in order to be treated as start-up costs under Sec. 195:
It would be deductible if they were paid or incurred in the operation of an existing trade or business
It must be paid or incurred prior to the date business begins
You can expense up to $5,000 in the year business begins. This amount is reduced dollar-for-dollar by the excess of total start-up costs over $50,000. This means that if your start-up costs are over $55,000 then you won’t be able to take the $5,000 deduction in the first year; however, it is not lost, you can amortize the total amount over 180 months beginning with the month the business begins.
You can also opt-out of the first-year deduction aforementioned, and amortize the total expenses over 180 months. Why? As glamorous as it sounds, there are multiple limitations on business losses. This means that having too many business deductions in certain tax years might not be a good idea.
I would like also to point out two additional scenarios; however, I do not wish this upon you.
If the business never begins, then these expenses are treated as non-deductible capital or personal expenses
If the business terminates before the 180 months, the unamortized expenses may be deducted in the business’s final year
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