Accounting & Bookkeeping & Small Business Forum

[Guest]

When setting up accounts for a startup business...how will you apply the expenses incurred during the setup and have no clients yet. (using Quickbooks) Sample: expenses for obtaining the business license, advertising, phone expenses, utilities, office supplies, etc.

[Guest]

Actually, most startup expenses that are business related can be treated as an expense of the business and deducted for tax purposes. Whether or not you have clients (and therefore any income) is irrelevant, especially in the first year.

[Guest]

Accounting purposes: Startup costs include organizational costs such as legal and state fees. They are expensed when incurred.

Tax Purposes:

Start-Up Costs

When you start a business, all of your costs are treated as capital expenses and are a part of your basis in the business. The costs of specific assets generally can be recovered through depreciation deductions. Other costs generally cannot be recovered until you sell or otherwise go out of business.

However, you can elect to amortize certain costs of setting up your business. These costs are deducted in equal amounts over 60 months or more. To be amortizable, costs must qualify in one of the following three areas:

Business start-up costs
Organizational costs for a corporation
Organizational costs for a partnership

Business start-up costs:

These include the costs you incur when you set up an active trade or business or investigate the possibility of creating or acquiring an active trade or business. To be amortizable, a start-up cost must meet the following tests:

It must be a cost that would be deductible if it were paid or incurred to operate an existing trade or business.
It must be paid or incurred before you actually begin business operations.
Start-up costs may include the following items:

A survey of potential markets
An analysis of available facilities, labor, supplies, and/or equipment
Advertisements for the opening of the business
Salaries and wages for employees who are being trained and the people who train them
Travel and other necessary costs for securing prospective distributors, suppliers, or customers
Salaries and fees for executives and consultants or for other professional services

Start-up costs do not include deductible interest, taxes, and research and experimental costs.

When you sell your business. If you completely dispose of a trade or business before the end of an amortization period, any deferred start- up costs for the trade or business that have not been deducted may be deducted to the extent that they qualify as a loss from a trade or business.

Organizational costs for a corporation:

These are costs incurred directly for the creation of a corporation. They include the costs of temporary directors, organizational meetings, state incorporation fees, and accounting services. They also include the cost of legal services, such as drafting the charter, bylaws, terms of the original stock certificates, and minutes of organizational meetings.

However, costs for issuing and selling stock or securities, such as commissions, professional fees, and printing costs, are not organizational costs and may not be amortized. Costs for the transfer of assets to the corporation are capitalized, not amortized.

To qualify for amortization, an organizational cost must be as follows:

Incident to the creation of the corporation. (The cost must be incurred before the end of the first tax year in which the corporation is in business. A corporation using the cash method may amortize organizational expenses incurred within the first tax year even if it does not pay them in that year.)
Chargeable to a capital account
A cost that could be amortized over the life of the corporation if the corporation had a fixed life.

Organizational costs for a partnership:

These are costs incurred to create a partnership. To be amortizable, an organizational cost must be chargeable to a capital account and must be one that could be amortized over the life of the partnership if the partnership had a fixed life.

The expenses must be for the creation of the partnership trade or business. Organizational expenses include legal and accounting fees for services incident to the organization of the partnership, such as the negotiation and preparation of a partnership agreement and filing fees.

Partnership organizational costs do not include syndication fees. That is, they do not include costs for issuing and marketing interests in the partnership, such as commissions, professional fees, and printing costs. These costs are capitalized and cannot be depreciated or amortized.

Start-up and organizational costs are deducted in equal amounts over a period of not less than 60 months. You can elect a period for start-up costs that is different from the period you elect for organizational costs as long as both are 60 months or more. Once you elect an amortization period, you cannot change it.

To figure your deductions, divide your total start-up or organizational costs by the months in the amortization period. The result is the amount you can deduct each month.

For partnerships on the cash method of accounting, however, no deduction is allowed for an expense that has not been paid by the end of the tax year. Any expense that would have been deductible as an organizational expense in an earlier tax year, if it had been paid, is deductible in the tax year of payment.

The Amortization Period:

The amortization period starts with the month you begin business operations. You can amortize only if you actually go into business. If it amortizes organizational costs, a partnership or corporation is deemed to begin business operations when it starts the activities for which it was organized. This can occur either before or after the corporate charter is granted or a partnership agreement is signed. A partnership or corporation begins business when its activities have reached the point where the nature of its business operations is established. For example, if it acquires the assets it needs to operate its business, this may constitute the beginning of business activities.

If you want to amortize your costs, complete Part VI of IRS Form 4562 and attach it to your income tax return. Also attach a separate statement to your return for each type of cost. The statement should show the total start-up or organizational costs you will amortize,
describe why each cost was incurred,
give the date each cost was incurred,
state the month your business began operations (or the month you acquired the business), and
specify the number of months in your amortization period (not less than 60).
Attach Form 4562 and the accompanying statements to your return for the first tax year you are in business. The return must be filed by the due date for the return (including any extensions).