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Speed Up Tax Deductions for Business Startup Costs

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Nov 22nd 2016
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Do you think you can build a better mousetrap? If you’re convinced you’ve found a viable niche, you might launch a new business venture before the end of the year. By getting all your ducks in a row, you can cash in on a tax break for business startup costs.

First, let’s review the basic tax rules. Unlike regular business expenses that are currently deducible, such as routine supplies and repairs, a business must amortize startup costs over a period of 180 months. However, the tax law says you can write off up to $5,000 of qualified startup costs that would otherwise be deductible as business expenses in the year the operation is “open for business” (i.e., it is ready to accept customers or clients).

Of course, the exact date will vary according to the nature of the business, but this generally means that you’re offering goods or services in exchange for payment.

If your business is entitled to a current deduction for startup costs, 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 doesnot include deductible interest, taxes, or research and experimental costs.

Amortizable startup 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 may help you determine whether or not to acquire a business. But costs incurred to purchase a specific business are capital expenses that can’t be amortized.

If you exceed the $5,000 limit for startup costs, the excess must be amortized over 180 months. What’s more, the $5,000 write-off is phased out on a dollar-for-dollar basis for costs above $50,000. In other words, no current deduction is allowed if startup costs are $55,000 or higher.

For example, suppose you’ve already incurred $40,000 in startup costs in 2016. It will cost another $12,000 to get the business up and running before the start of next year. Because the startup costs will total $52,000 ($40,000 + $12,000), the maximum first-year write-off would be limited to $3,000. In this case, you might postpone $2,000 of those costs to 2017, if you can still meet the requirements for a current deduction.

Take a close look at the numbers now and act accordingly. This is a good way to get your new business off on the right foot.

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