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Tax Treatment of Business Start Up Expenses

January 14, 2010

This information on the IRS tax treatment of business start up expenses is provided by Bill Haman, of SCORE Cincinnati.

Business Start-up Costs are costs for setting up or investigating an active trade or business.  They include any amounts incurred in connection with an activity engaged in for profit and the production of income in anticipation of the activity becoming an active trade or business. These costs, according to the IRS, may not be deducted as paid or incurred, but must be amortized over no less than sixty (60) months.

Business start-up costs may include  surveys of potential markets; analyses of available facilities, labor, supplies, etc.; salaries and wages of employees being trained; advertisements for the business opening; travel and other costs of securing distributors, suppliers or customers; costs of organizing and setting up;  salaries and fees for executives  or other professional services. These amortizable costs must be costs you could deduct as a business expense to operate an existing business but incurred or paid before the business begins operations. (Section 12 of IRS Publication 535).

Capital Expenses are costs of property acquired and held for the production of income. The property must have a determinable useful life of longer than one year and must be something that wears out, decays, gets used up, becomes obsolete or loses value from natural causes. They do not include inventory, land, repairs or replacements. Such capital expenses may not be deducted as a business expense when incurred or paid but must be depreciated over the property’s useful life.

Working Expenses are all other costs of doing business which may be deducted in the year incurred or paid. Such include purchase of inventory, purchase of office and operating supplies, salaries, employee wages, payroll taxes, contract services, equipment, tools, repairs, maintenance, advertising, vehicle expense, travel expenses, accounting and legal services, rent, utilities, insurance, business loan interest, etcetera.

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