When opening a business, you may have to spend money on equipment, vehicles, legal fees, and leasehold improvements before you can start making money. All of these expenses can be deducted, but they have receive a special tax treatment because they were incurred before your business was open.
Equipment and furnishings:
Equipment can’t be deducted until it’s put in service. So, equipment can’t be deducted or depreciated until your business is open.
On the bright side, equipment placed in service before opening your business, but during the same year you opened is still eligible for Section 179 depreciation and bonus depreciation. Section 179 can be used to immediately expense the total value of your equipment up to the lesser of your business income or $500,000. Bonus depreciation can be elected in tandem with Section 179, but the equipment has to be brand new.
If you’d prefer to draw out your depreciation over the life of your asset, you don’t have to claim Section 179 depreciation.
Cars and trucks are treated like equipment and are depreciated over 5 years. But, they come with their own ‘listed property’ or ‘luxury auto’ special rules.
In 2016, cars that weighed under 6,000 pounds are limited to $3,160 of depreciation ($3,560 for trucks). If you can electing bonus depreciation, you can add an extra $8,000 to those figures.
New business owners can deduct up to $5,000 of start-up costs in the first year of business. Unfortunately, that amount if limited by any start-up costs in excess of $50,000. Any excess start-up costs have to be amortized and claimed over 15 years.
If you would prefer not to deduct and amortize your start-up costs, you can capitalize them and add them to the basis of your business. Unlike basis in other assets, basis in your business only comes into play when selling or ending your business which means your start-up expenses will have to stew a while before you can recover them.
Start-up costs include:
- Surveys/analyses of potential markets, labor supply, products, transportation, facilities, etc.
- Advertisements related to opening the business
- Wages and salaries paid to employees, and their instructors, while they are being trained
- Fees and salaries paid to consultants or others executives
- Travel and related costs to secure prospective distributors, suppliers, or customers
New partnerships or corporations can deduct up to $5,000 of organizational expenses in the first year, in addition to any claimed start-up costs. The $5,000 is also limited by any organizational costs in excess of $50,000. Similarly, organizational costs must be deducted & amortized or capitalized & added to basis.
Organizational costs include: legal fees and incorporation fees.
The first year of business is often the hardest and the special business expensing rules make it even harder. But, keep accurate records of everything and we’ll sort it out during tax season. If you have any business questions, don’t hesitate to call.