The beginnings of a new business are a daunting, yet promising, time.  With the multitude of issues associated the first thought in a new business owner’s mind is never accounting or taxes, unless they are the proud founder of a new CPA firm.  One of the many tax related issues that universally presents itself is the concept of “start-up costs.”

The tax treatment of start-up costs is actually quite simple, with a few nuances.  The treatment of start-up costs is governed by an “election” that really isn’t an election.  That’s because to make this election you do nothing.  By doing nothing, you are allowed to deduct the first $5,000 of start-up costs, reduced dollar for dollar by any amount over $50,000.  So if you pay $55,000 of start-up costs, you’re out of luck on that front.  Fortunately, this election allows you to amortize (a fancy word for deduct) the excess over a 15-year period, lucky you.

Well if that’s what you get by doing nothing, what’s the other option?

You can elect out of the election with a statement on your first return, and never deduct these costs, until you dispose of your business.  It’s quite nice that they make you think before you do something crazy like that.

So, if the tax treatment is really that easy, what’s all the fuss about?  The hard part is figuring out what constitutes start-up costs.  To oversimplify, it comes down to two factors:

1. When were the costs incurred, and
2. Whether or not the expenditures are specifically excluded from being start-up costs

The second of those factors is the simpler, because it comes down to quite a short list.  Start-up costs do not include, no matter when incurred, the following:

• Costs that are otherwise capitalizable, such as;
  • Fixed assets
  • Intangibles
  • Organizational costs
  • Syndication costs
  • Costs that are otherwise not deductible

Okay, so if the expense doesn’t make that short list, it’s a start-up cost?  Not quite.  To be subject to the rules of start-up costs the expense must take place prior to the day on which the business begins.  Identifying that date is what can throw a wrench.

That day is heavily dependent on facts and circumstances, and is what will likely leave you crying for a CPA.  For some businesses and industries it can be very simple, but for others not so much.  It can come down to a question as simple as “When did the doors open?”, or it can grow into an issue of court findings and precedence.  If you find yourself in the midst of beginning a new business venture and are concerned about identifying your start-up costs, or a plethora of other issues, don’t hesitate to contact the CPAs at Dermody, Burke, & Brown.

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.