Starting up a business is capital intensive. You wonder when the bleeding will stop. At the very least, you want to get the tax deductions for your start-up expenses to relieve some of the pain on tax day. However, it is important to know that you may not be able to take those deductions for 2017 if you don’t launch the business until 2018, that is, open your doors and start earning money.
While the allowable expenses are the same, there are 2 different tax code provisions for business expenses. There is one for start-up expenses and one for daily operating expenses of the business. Section 162 of the Internal Revenue Code allows current deductions for ordinary and necessary business expenses incurred in operating an existing active business.
Start-up expenses fall under Section 195 of the Internal Revenue Code and apply to ordinary and necessary business expenses incurred before the active conduct of the business begins. Businesses can deduct and/or amortize business start-up expenditures of up to $5,000 of start-up expenses can be deducted in the year when active conduct of the business begins — but not before that year. Any start-up expenses that cannot be deducted in the year when the active conduct of business begins are capitalized and amortized over 15 years (180 months), starting with the month when the active conduct of business begins. However, the $5,000 allowance is reduced dollar for dollar by a number of cumulative start-up expenditures in excess of $50,000.
As the end of the 2017 tax year is coming to a close, you may want to speak with your tax advisor about tax strategies for 2017 and 2018 if your business won’t be open before the tax year ends on December 3, 2017.