Blog by Kim Storen, EA – Managing Tax Accountant, Business Services Manager
We get this question all the time…I am thinking of starting a business, can I deduct my research and start up expenses? Not surprisingly, this is a very complicated part of the tax law for a seemingly simple question.
There are really 3 phases to this question…
Phase 1 is the groundwork of starting a business; researching ideas, networking, talking to other professionals in the business, visiting franchises and choosing the business to start. Unfortunately, Phase 1 is never deductible according to the IRS. The IRS considers this just personal time and “trying to find your way”. This is always very disappointing for clients when they find this out!
Phase 2 starts from the moment you have identified the business to open or the franchise to purchase until the moment you make your first dollar of income. This is called the Start Up phase. Expenses incurred during the start up phase such as legal fees, franchise fees, purchasing equipment, setting up a location, recruiting, office supplies, etc. are only deductible once the business is open and considered “Carrying on Business”. If your start up expenses are less than $50,000, you can deduct up to $5000 of start up expenses immediately and the remaining expenses are amortized over 5 years.
Phase 3 is when the business is open and carrying on business. This is typically identified as the moment you open your doors to the public or when you receive your first dollar of income. Section 162(a) of the tax code identifies this as….”until such time as the business has begun to function as a going concern and performing those activities for which it is organized”. From this point forward, all expenses that are Necessary and Ordinary to carry on your business are deductible.
It is important to keep in mind that if you never start your business or earn a dollar, the expenses that you have incurred are NEVER deductible.
At Storen, we are very helpful and knowledgeable if you are interested in starting a new business so call us anytime!