Can You Claim Expenses Before A Business Starts?

Glasses on a business expense claim form

When starting a new business most startup founders have to spend a large amount of their own personal money to start the business. While that may be stressful there is good news, you can now take a start up deduction to limit your tax bill. Here’s how:

What Can I Write Off As a Startup Founder?

Once you launch your business the cost of all business expenses become deductible. These business startup costs are capital expenses. These are the costs that you incur to get an asset (a business) that will benefit you for more than one year.

In most cases you are unable to deduct expenses unless you sell or dispose of the business; however, there is a tax rule that will allow you to deduct up to $5,000 in start up expenses a year then after that you can deduct the remainder over the course of 15 years.

Here are examples of start up costs you can write off:

  • Legal and accounting fees
  • Licenses, permit, and other fees
  • The cost of investigating what it would take to create a successful
    business, including research on potential markets or products
  • Advertising costs, including advertising for your business opening and creating a business website
  • Office rent and utilities paid before the business begins operating
  • Rental of business equipment such as computers and office supplies
  • Costs for employee training before the business opens, and
  • Expenses related to obtaining financing, suppliers, customers, or
    distributors.

Can A Small Business Deduct The Cost Of A Computer?

Yes and no which means it depends on the situation. If you purchase a computer for your business and you use that computer exclusively for your business you can deduct the entire cost. If you use it for more than half of the time for your business you can also deduct the cost.

Additionally, you have to take into consideration your personal time. If you use a computer only 60 percent of the time, you can only deduct 60 percent of the expense.

Are There Exceptions to Start Up Cost Deduction?

There are exceptions to start up cost deduction because some costs related to opening a business may not be considered a start up expenses.  A few of these exceptions could include the following:

  • Inventory
  • Mile Tracking
  • Long-Term Assets
  • Research and Development Costs
  • Organizational Costs

When Can You Deduct Business Startup Costs?

Expenses that began as start up expenses are now operating expenses once your business fully launches. An example of this could include supplies such as paper, pens, printers, computers, etc.  These operating costs are the things that keep your business going on a day to day basis.

For Tax Purposes, When Does My New Business Begin?

Many people often ask when does your new business begin and according to tax purposes the IRS says that a venture becomes a business once it acquires all the assets necessary to perform its intended functions. You must also put those assets to work. The moment you start doing business is when you start doing business even if you aren’t yet earning money.

For example, If you have business that provides therapy to customer or clients your business begins when you first take the initiative to offer your services to other people. According to the IRS nobody has to hire you before you can become a full business you just have prove you are available to be hired.

In what ways can you claim expenses before a business starts? We’re always open to new thoughts, leave your comments below.

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