Start Up Expenses - John R. Dundon II, Enrolled Agent
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Start Up Expenses

Business Entity Selection and the Tax Consequences of Converting

Start Up Expenses

The two major start up business expenses are the costs to organize and the costs of normal business expenses incurred prior to the beginning of business or the point where the business is ready to receive revenue. Sole proprietors do not normally have costs to organize because a business entity is not formed however they could expend substantial up-front business expenses. Under the Small Business Jobs Act of 2010, the amount a taxpayer can deduct for start up expenditures is increased from $5,000 to $10,000 [IRC Sec. 195(b)(3)].

Additionally starting in 2010 the phaseout threshold is increased from $50,000 to $60,000. Amounts in excess of $10,000, but less than $60,000, are amortized over fifteen years. What this means in plain terms is that the $10,000 (previously $5,000) deduction for start up expenses is now reduced (but not below zero) by the amount of cumulative start-up expenditures that exceed $60,000 (previously $50,000).

Start-up expenses have always been an item IRS examiners address in an audit of a new Schedule C business. I often get asked in examination if the sole proprietor deduct all costs from the first “idea” day until the first “business” day. It is important to have supporting documentation supporting both dates.

Start-up expenses could include advertising; salaries and wages paid to employees who are being trained and their instructors; travel and other expenses incurred in lining up prospective
distributors, supplies, or customers; salaries or fees paid or incurred for executives, consultants, as well as similar professional services, interest (Sec. 163), taxes (Sec. 164) and research and experimental expenses (Sec. 174).