Under federal law you are technically not allowed to begin taking your business deductions until you’ve actually started up your business. This means your business has to actually providing the services or goods you will be offering.
Of course, anyone who has gone through the business formation process knows just how much time and money goes into planning and preparing the business before you actually begin standard operations. This can be a significant financial investment. So considering this money is going toward business expenses, does this mean you’ll be able to write off some of the costs involved in creating a startup?
You might, for example, have a lot of equipment you needed to purchase to get the business up and running. In some cases, that equipment might even have been purchased before you even conceived the idea of your business.
Fortunately, there are some ways you can write off pre-purchased equipment as a business expense—it just might not happen as quickly as you like.
Here is some information to keep in mind as you do your tax preparation in Des Moines, IA as a new business owner.
Expenses incurred specifically for the business
There are a lot of expenses that you must handle when first starting your business. It costs money to purchase equipment, advertise your new company, conduct market research, arrange travel for your distributors or suppliers, pay your employees who are being trained and pay your consultants who are helping you through the startup phase.
The IRS is understanding of the financial burden placed on new business owners, so it does allow up to $5,000 of deductions for startup expenses in the year the business is formed. Any money spent beyond that initial $5,000 amount to help you start your business can then be amortized over a 180-month period.
However, there are a few items that cannot be included in startup costs, such as developing inventory, R&D costs, long-term assets and organizational costs. Long-term assets are only allowed to be depreciated if they cost more than $2,500, and the legal costs of setting up your business are treated separately (also subject to the $5,000 deduction limitation).
Expenses not incurred specifically for the business
There are some circumstances in which people use items they did not initially purchase for business purposes. While you cannot write off these costs as part of your startup, you may still be able to get some financial breaks on them.
These expenses are depreciated after your business starts, based on the fair market value of the item at the time you started using it for business purposes or the original price of the item, whichever is lower.
If you have any questions about what items can and cannot qualify for deductions when you’re first starting up your business, we encourage you to contact the team at Accounting & Tax Professionals, PLC and speak with an expert in tax preparation in Des Moines, IA. We look forward to answering any questions you have.