Contributed by: PhillipB, FreeTaxUSA Agent, Tax Pro and Henry, FreeTaxUSA Agent, Tax Pro
If your new business is still in the start-up phase and hasn’t received any gross income, you won’t file a Schedule C until the business is actively operating.
What do I do with the expenses I had during the start-up phase?
Before your business begins active operations, you may incur start-up costs – expenses to investigate, create, or set up the business – as well as organizational costs, such as legal and accounting fees to form the business entity.
Tax law allows you to elect to deduct up to $5,000 of start-up expenses in the first year your business is in operation. A similar election is available for organizational expenses. These are two separate deductions, each with its own $5,000 limit – start-up expenses and organizational expenses aren’t combined for this purpose.
The $5,000 deduction for start-up expenses, and the $5,000 deduction for organizational expenses, is reduced dollar-for-dollar by the amount your start-up or organizational costs exceed $50,000 (for each category). For example, if your start-up costs are $52,000, that’s $2,000 over the $50,000 threshold, so your available deduction shrinks by $2,000, leaving you a $3,000 deduction instead of $5,000.
If your start-up expenses or organizational expenses reach $55,000 or more, the first-year deduction for that category is reduced to zero.
Any costs that aren’t deducted in the first year – whether due to this phase-out or because you didn’t elect the full $5,000 deduction – must be amortized over 15 years, rather than deducted immediately.
Keep good records of all the expenses you incur while getting ready to open your business. When your first business tax return is due, add up your start-up expenses and your organizational expenses separately to determine each total.
On your first-year tax return, you can elect to deduct up to $5,000 of start-up expenses and up to $5,000 of organizational expenses as current business expenses. Enter them as miscellaneous business expenses on the Common Expenses screen by following menu path: Income > Business/Rental Income > Business Income (Schedule C).
You aren’t required to deduct the full $5,000 if you’d rather amortize the expenses instead.
Any remaining start-up or organizational expenses above the amount you deduct are entered as an “intangible asset” in the Depreciable Assets section, and the 15-year amortization period begins with the month you start business operations.
When is my business considered to be actively operating?
If your business opens next year, but you don’t receive any income that year, you still file a Schedule C and report all your expenses (including start-up and organizational expenses).
Factors to consider in determining whether your business has opened include whether you:
- Started advertising your business to the public
- Opened a business location
- Hired employees
- Have active contracts
- Acquired inventory
The IRS often looks at the facts and circumstances as a whole, rather than a single factor.