Maximizing the Deduction for Start-Up Expenses

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Individuals starting a new business or acquiring the assets of an existing business often incur start-up expenses, which can be considerable, in the investigation and acquisition phase before actual business operations begin. Most start-up expenditures can be segregated into two broad categories: (a) investigatory expenses and (b) business pre-opening costs.

Taxpayers can immediately deduct up to $5,000 of start-up expenses in the year when active conduct of a business begins. However, the $5,000 instant deduction allowance is reduced dollar for dollar by cumulative start-up expenses in excess of $50,000 for the business in question. Start-up expenses that cannot be immediately deducted in the year a business begins must be capitalized and amortized over 180 months on a straight-line basis. In many cases, start-up expenses for small businesses will be modest enough to qualify for immediate deduction under the $5,000 instant deduction allowance in the year when active conduct of business commences.

Example: Claiming the deduction for start-up expenses.

Suzie (a calendar-year taxpayer) incurs $4,200 of start-up expenses in 2012 before opening her new car wash in November of 2012. Suzie’s 2012 deduction is $4,200. Since her start-up expenses did not exceed $50,000, she can deduct the entire $4,200 in 2012.

Note: A taxpayer is not considered to be engaged in carrying on a trade or business until the business has begun to function as a going concern and has performed the activities for which it was organized.