Start-up expenditures generally must capitalized and amortized over a 15 year period. However, for years after 2010, you may elect to expense up to $5,000 of start-up costs in the year the business begins, and then amortize the balance over 15 years. The first year expense limitation amount is reduced to the extent total start-up expenditures exceed $50,000.
Start-up expenditures are amounts paid or incurred in connection with investigating the creation, acquisition or establishment of an active business. But start-up expenditures do not include any amounts that would be deductible as interest, taxes or R&D expenses. If a business is disposed of before the end of the 15 year amortization period, any expenditures not yet deducted may be deducted to the extent the disposition results in a loss.
A corporation that makes expenditures in an unsuccessful effort to start or acquire a business may deduct such expenditures as a loss. Non-corporate taxpayers not engaged in the business of locating or promoting new business ventures cannot deduct the cost of unsuccessful searches or investigations (they are considered personal expenses). However, once the non-corporate taxpayer has focused on the acquisition of a particular business, unsuccessful start-up expenditures are deductible as business losses.
You may deduct expenditures related to expansion of your existing business if you can show that the contemplated business expansion and the existing business are closely-related. But such expansion costs must be capitalized and amortized if they provide you with long term benefits, create separate and distinct assets or relate to a change in the nature of your business operations.
If you have any questions about whether to deduct or amortize start-up expenditures, or whether you can write-off unsuccessful start-up expenditures as losses, please give me a call or email at (937) 223-1130 or jsenney@pselaw.com. And please send a copy of SenneySays to your to your friends.
AND ONE MORE THING. Tax deductions are a matter of “legislative grace.” You are only entitled to take a tax deduction if you meet all of the requirements for such deduction as set forth in the federal tax code and regulations. In order to qualify for tax deductions, you are generally required to adequately substantiate the amount, timing and purpose of the deduction. In some cases you are required to go even further and maintain a contemporaneous written log to substantiate the expenses. In other cases, you may be permitted to estimate your expenses based on the US Tax Court’s Cohan rule. More about substantiation of tax deductions in a future blog. If you want to talk about it now, please call or email me at Jsenney@pselaw.com or 937-223-1130.
Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423
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