The school year is off and running—have your start-up clients launched as well? It may make a big difference in tax status. If your clients can get their businesses up-and-running before the end of the year, they may currently deduct qualified start-up costs. Otherwise, these expenses must be amortized over 180 months—a whole 15 years.
Here's how it works: A taxpayer can deduct start-up costs that would normally be deductible as business expenses once it is "open for business"—that is, it is ready to accept customers or clients. This date will vary, according to the type of business, but it generally means that goods or services are being provided in return for remuneration. If an entrepreneur is entitled to a deduction, the list of qualified expenses includes the following:
- Studies of potential markets, products, labor supply, transportation facilities, etc.
- Advertisements for the opening of the business.
- Salaries and wages to train employees.
- Travel and other necessary costs for securing prospective distributors, suppliers or customers.
- Salaries and fees for executives and consultants or for similar professional services.
However, the list does not include deductible interest, taxes or research and experimental costs. Amortizable start-up costs for purchasing an active trade or business include only those investigative costs incurred in the course of a general search for or preliminary investigation of the business. These are costs that help decide whether or not to acquire the business. But costs incurred to purchase a specific business are capital expenses that can't be amortized.
What's happening this year: For 2014, a taxpayer may claim a first-year deduction for up to $5,000 of qualified start-up costs. (Prior to 2011, a maximum $10,000 deduction was allowed.) Any remainder must be amortized over the 180-month period. But be aware that the $5,000 write-off is phased out on a dollar-for-dollar basis for start-up costs of more than $50,000. In other words, no current deduction is allowed if start-up costs are $55,000 or more.
Suppose, for example, your client has already incurred $40,000 in start-up costs. It will cost the client another $12,000 to get the business going before the start of next year. Because the start-up costs come to a total of $52,000 ($40,000 + 12,000), the maximum first-year write-off would be limited to $3,000.
The bottom line: Previously, you had to make a proactive election to currently deduct start-up costs. But now this tax treatment is automatic. All the client has to do is file his or her 2014 tax return in a timely fashion.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...