Other than helping to formulate a
business plan, one of the first issues we deal with on a tax and
accounting basis is how to treat the startup costs that any new
venture inevitably incurs. Typically, the costs of starting a
business (those expenses you incur before the business actually begins
operating) are considered capital expenses.
In other words, the money you spend for
advertising, training employees, legal and accounting expenses and
other pre-opening costs are accumulated into one lump-sum
"startup costs" and recorded as an asset on your balance
If you are actually successful at getting
your enterprise off the ground, you can elect to amortize the costs (that
is, deduct them in equal installments) over a period of at least 60
months, beginning with the month in which your business opens. Only
those costs that would ordinarily be deductible by an operating business
are eligible for the amortization election.
Expenses That Aren't Eligible For
Partnership organization - There
are special rules for organization costs incurred in the formation of a
partnership which aren't covered in this article. Please consult
Costs of issuing stock - Examples
would include broker commissions, sales fees, etc.
Costs of acquiring depreciable
property - These costs would be added to the basis of the asset and
Interest, real estate taxes, and
research and experimental costs - These costs may be deducted when
If You Don't Go Into Business
What happens, however if your business
acquisition falls through or you simply decide not to start a new
business? Here, the rules get somewhat tricky.
If you are acting as an individual (as
opposed to a corporation), then your costs must be broken down into two
Those costs you incurred before making a decision to
acquire or begin a specific business are considered personal and
nondeductible. They include any costs incurred during a general search
for, or preliminary investigation of, a business or investment
Any costs you incurred in your attempt to
acquire or begin a specific business are capital expenses and you can
deduct them as a capital loss.
If you are a corporation and your attempt to go into
a new trade or business is not successful, you may be able to deduct all
investigative costs as a loss. The costs of any assets acquired during
your unsuccessful attempt to go into business are a part of your basis in
the assets. You cannot take a deduction for these costs. You will recover
the costs of these assets when you dispose of them.
As you can see from the discussion above, its best
to talk to us "before" you begin looking for a new business to
open. We can assist you in planning for any costs you may incur so
that you at least obtain a full deduction if your new business venture
fails to get off the ground.