Starting a new sole-owner business
March 20, 2012
Lots of people start a new sole-owner business every year. Internal Revenue Code Section 195 allows deductions for the “getting ready” or “organizational” expenses for individuals.
Corporations and partnerships (LLCs) have special code sections and rules.
The deduction for start-up expenses is $10,000 beginning in 2010. If the total is more than that, the excess is deducted over a period of not less than 60 months, if the total is less than $60,000.
The tax year in which a trade or business begins is the year to claim those costs.
Eligible start-up costs include investigatory costs are incurred in reviewing a prospective business before reaching a final decision to acquire or enter into that business. That includes the costs of doing an analysis of the potential markets, investment bank evaluation services and preliminary due diligence done by an attorney or accounting firm.
Start-up expenses are costs incurred after a decision to establish a particular business and before the business actually begins operations. The time you are ready to serve customers or clients marks the beginning of operations.
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Examples of business start-up expenses include advertising, training, travel to line up distributors, suppliers or customers and fees incurred for consultants and similar professional services.
Acquisition costs, the amounts paid for the purchase of property and after opening for business-deductible ordinary and necessary business expenses, are not start-up costs. Those are deductible under various other rules, such as depreciation expense, etc.
All this real boils down to is an acceleration of expenses to get ready to do business. That is Congress’s way of encouraging new business ventures … a quicker tax deduction.
Of course there is no deduction for a sole owner for the time (blood, sweat and tears) spent to consider and to get ready to open the doors to the public.
Further, there is no deduction for all the work to get licensed and registered with all of the various government agencies before the business opens.
Unsuccessful start-up costs are deductible as a loss if connected to a trade or business or a transaction for profit.
Did you hear, “Nothing is simple any more. Where are the good old days?”
• John Bullis is a certified public accountant, personal financial specialist and certified senior adviser serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.