As business consultants, we get approached every day it seems by a client or potential client with a new business idea they are investigating.  As we all know, some of those ideas work out and become viable enterprises and some never get off the ground.

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 sheet.

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 Amortization

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 our office.

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 depreciated.

Interest, real estate taxes, and research and experimental costs - These costs may be deducted when incurred.

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. 

Individual Rules

If you are acting as an individual (as opposed to a corporation), then your costs must be broken down into two categories.  

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 possibility.

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.

Corporate Rules

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.

Summary

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.