Tax Court: Be Open for Business if You Want Tax Benefit

Are some of your clients who are planning to start a new business? If certain requirements are met, they could be in line for a special tax break for start-up costs.

Jan 28th 2020
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While this benefit is still available, there is a caveat. A new Tax Court case involving a maple and blueberry syrup producer, Primus, TC Summary Opinion 2020-2, 1/7/20, found you can’t claim this tax benefit unless you’re officially “open for business.”  

Background: Unlike regular business expenses that are currently deducible, such as routine supplies and repairs, a business is generally required to amortize start-up costs over a period of 180 months. But the tax law says you can write off up to $5,000 of qualified start-up costs that would otherwise be deductible as business expenses when the business is ready to accept customers or clients.  Of course, the exact date depends on the nature of the business, but this typically means that you’ve started offering goods or services in exchange for payment.

If your client’s business is entitled to a current deduction for start-up costs, it can write off certain expenses, including the following:

  • Studies of potential markets, products, labor supply, transportation facilities, etc.
  • Advertisements for the business opening
  • Salaries and wages for employee training
  • Travel and other necessary costs for securing prospective distributors, suppliers or customers
  • Salaries and fees for executives and consultants or for similar types of professional services

If the business exceeds the $5,000 limit for start-up costs, the excess must be amortized over 180 months. Furthermore, the $5,000 write-off is phased out on a dollar-for-dollar basis for costs above $50,000. In other words, if start-up costs exceed $55,000, your write-off is zero.

Facts: In the new case, the taxpayer worked as an accountant in a large firm in New York.  He purchased real estate with maple trees large enough to produce sap. Before collecting sap and producing syrup, however, the taxpayer wanted to thin the maple bush, which would cause the trees to produce more and better sap, and install a pipeline to collect the sap. He would not be able to thin the maple bush after installing the pipeline.

When the taxpayer acquired the property, he also decided to produce blueberries. In 2012 and 2013, he cleared areas where he planned to plant blueberry bushes. The taxpayer ordered 2,000 blueberry bushes in 2014 and planted them in 2015. But he had not harvested any blueberries as of the time of the trial.

Based on all the facts presented above, the Tax Court determined that the business has not yet begun operations. Therefore, the taxpayer wasn’t entitled to current deductions for the start-up costs.

Moral of the story: Encourage clients to move fast once they’re ready to proceed. If they can get the operation up-and-running before the end of the year, they will benefit from the write-off for start-up costs. Otherwise, they’ll have to wait longer to collect any tax benefits.

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