Starting a business? How expenses will be treated on your tax return

Starting a business? How expenses will be treated on your tax return

Government officials noticed a big boom in new businesses during the COVID-19 pandemic. And the U.S. Census Bureau says business applications are still increasing slightly (0.4% increase from April 2023 to May 2023). They keep track of this by counting the number of businesses applying for Employer Identification Numbers.

If you're one of those entrepreneurs, here's something you might not know: a lot of the expenses you rack up while starting your business can't be deducted right away on your tax return. It's important to understand that how you handle your initial expenses can make a big difference in the amount you owe in federal taxes.

Here's the lowdown on expenses:

1. Start-up costs: These are the expenses you incur while getting your business up and running or when you're exploring the idea of starting or buying a business.

2. Deducting start-up and organizational costs: The tax code lets you deduct up to $5,000 of start-up costs and $5,000 of organizational costs in the year your business kicks off. But let's be real, $5,000 doesn't stretch very far these days! Plus, this deduction gets reduced by the amount that exceeds $50,000 in total start-up or organizational costs. If you have any remaining costs, you'll need to spread them out over 180 months in equal portions.

3. When deductions kick in: You can't deduct anything until your new business is actively up and running. That means you have everything in place to start earning money. The IRS and courts typically ask questions like: Did you start the business with the intention of making a profit? Were you regularly and actively involved? Did the business actually begin its operations?

Qualifying for deductions:

1. Start-up expenses: These are the costs you incur while investigating or creating a business or engaging in activities that aim to turn a profit.

2. Organization expenses: These costs are related to setting up a corporation or partnership. Think legal and accounting fees for organizing your new business or fees paid to the state for incorporating.

The decision you need to make:

If you want to deduct your start-up expenses this year, you'll have to decide whether to go for the above-mentioned election. Keeping good records is crucial. Reach out to us for guidance on your start-up plans. We can help you navigate the tax and other aspects of your new venture.