Today TaxMama hears from Doug, an Enrolled Agent in Northridge, CA who insists that, “The special $5,000 deduction for start-up costs spent by businesses after 10/22/2004 only applies to companies who’ve already started doing business. They can’t take the deduction the year before the business opens their doors.”
TaxMama disagreed with Doug, so, it was time to research the question and see who was right.
Before digging any deeper into the Tax Code, TaxMama went first to IRS Publication 535 – Business Expenses. In Chapter 8, Costs you can Deduct or Capitalize, IRS says – https://www.irs.treas.gov/publications/p535/ch08.html
Business start-up and organizational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized. For information about amortizing start-up and organizational costs, see chapter 9.
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Note the “paid or incurred after October 22, 2004” phrase.
There’s no requirement for the business to be in operation that I can see.
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But, aaaaahhhh….two paragraphs over it says….
How to make the election. You elect to deduct the start-up or organizational costs by claiming the deduction on the income tax return (filed by the due date including extensions) for the tax year in which the active trade or business begins. However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions).
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Clearly indicate the election on your amended return and write “Filed pursuant to section 301.9100-2.” File the amended return at the same address you filed the original return. The election applies when computing taxable income for the current tax year and all subsequent years.
Note the phrase – for the tax year in which the active trade or business begins.
And there you have it. Doug is absolutely correct. You may NOT deduct start-up costs in the year before the active trade or business begins!
So, how do you make sure your costs are deductible in the first year, before the business is quite ready for prime time?
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Make part of it ready and sell something. Start selling products or services, even if they are beta products or services.
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After all, once you’re actively in business, you can deduct $5,000 that you might otherwise have had to split over 15 years.
And remember, you can find tax strategies answers to questions about start-up costs and all kinds of other tax issues, free. Where? Where else? At TaxMama.com
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