Start-up costs are not a deductible business expense

Business start-up costs are considered capital and are amortized over 180 months.

Operating a business has tax implications. You have to pay taxes on the business profit. You will pay property taxes perhaps. And you cannot deduct your start up costs as a business expense. Start-up costs have different tax implications.

Starting a business requires you to do research, pay an attorney, hire an accountant, purchase marketing services, remodel rental space and many other costs associated with organizing your business, all before you make your first sale. These costs are treated as capital investment and are not treated as a business expense.

You must capitalize your start-up costs instead of taking an immediate deductable expense. You will have to amortize your start-up costs in equal, straight-line, expenses over 180 months. For most start up business, this will be over 15 years. Some of theses expenses are ordinary deductible business expenses that would be deducted if incurred after the first day the business is in operation. As with most tax treatments, there are variances.

In general, you can deduct $5,000 of your start up costs the first year (or partial year), and then deduct the remaining over the next 15 years in equal amounts. That is only if your initial start up costs are $55,000 or less: If more than that, you must amortize the entire amount over 180 months. You must should out and consult with a knowledgeable CPA to assist you in your decision-making.

As with most small business start-ups, cash is precious and scarce. Since most start-up expenses would be ordinary business expenses after you are in an operational stage of your business, perhaps you should organize your business and start selling products prior to incurring typical start up expenses.

Some start-up expenses that could be delayed until after operations begin are advertising, printing, postage, legal, accounting, equipment purchases, leasehold improvements and wages. If you can postpone some start up expenses until after you start making sales, it will allow you to better manage your early stage cash flows.

Paul J. Werner is a Michigan State University Extension educator from L’Anse, Michigan. You can obtain free business counseling by registering with the MSU Product CenterWerner has many years of experience in small business ownership and entrepreneurship; he and his wife currently own two small businesses in the Upper Peninsula of Michigan. 

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