I'm using TurboTax Home and Business for the first time. I started a sole proprietorship in 11/2021. I have various expenses (books, training, etc.) that I incurred throughout 2021 as I worked getting my business off the ground. The total amount is less than $2000. Does it matter for tax return purposes if in TurboTax I enter these expenses as "Startup Costs" or "Other Common Business Expenses"?
Using the start up costs category saves you some work. When entering start up costs you can enter them as one total instead of in various business expense categories.
Additionally, if you have other expenses in the same categories as some of your start up costs, when you put them in, you now avoid potentially having an overly large entry in an expense category for your business (an potential IRS flag).
With the costs being below $5000, they will be expensed either way.
However, had those start up costs exceeded $5000 any amount over $5000 would become an asset and be capitalized.
Thank you!! Is there a resource explaining how to distinguish between start-up cost or non-start up cost when the item is the same? For example, the two main costs I have are paying for advertising (web pages) and buying books and trainings - could I just make all such expenses in 2021 start-up costs? Or if I started my business in 11/2021, are all expenses pre-November start up costs, while expenses (for the same types of items) incurred in December not start-up costs? Thanks!
The second part of your statement is accurate.
Start-up costs are those expenses incurred in planning and setting up the business, costs you incur before you open the door. Once you "open the door", they become expenses.
A portion of startup and organizational costs can be expensed (written off in your first year). The remainder can be amortized (written off over a period of 15 or more years).
Here is how it works:
Expenses paid or incurred after October 22, 2004:
- You can deduct up to $5,000 in startup and $5,000 organizational costs as current expenses if the costs are under $50,000, respectively.
- You can choose to amortize startup and organizational costs greater than $5,000, respectively, (but less than $50,000, respectively) over a period of 15 years.
- If your startup or your organizational costs are more than $50,000, respectively, the excess amount reduces the amount you can deduct.
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Note: A cash-basis business cannot deduct or write off (amortize) these costs until they are actually paid.
Just trying to resolve a potential discrepancy in the above answers. Let's say I have $1000 in business expenses in 2021. My business started in December 2021, but the expenses were incurred throughout 2021 i.e., in December, and before). Since the amount is below $5000 can I just enter them as "Other Common Business Expense" and not "Startup Costs"? The reason I didn't want to list them as Start up costs is that it appears that if you enter them in Startup Costs you have to have a separate entry (and date) for each item - so I'd have like 15+ entries. Conversely, if I enter them as Other Common Business Expense I could combine entries (e.g., the 5 or 6 training-related entries could just be one "training" expense). Thanks!
You would deduct those expenses as start-up costs. Startup costs come from investigating the creation or acquisition of an active trade or business. They are paid or incurred before the business opens its door. You said these expenses occurred before your business opened in December 2021. Therefore, they would be start-up costs.
To confirm, please see this tax tip from the IRS Here’s how businesses can deduct startup costs from their federal taxes.
Thanks! In that case, is there any way to enter the start-up expenses in bunches? For example, let's say I purchased 8 work-related books in 2021 before I opened my doors for business. Do I have to have 8 separate entries (because I purchased each book on a different date)? It seems like such a long list could be a red flag for the IRS. But if I consolidate it into one "books" entry, I'm not sure what date to put. The date of the first book purchase? The last book purchase? Something else? Thanks.
No, you should not list individual costs that were paid before opening the doors for business operations. The key to start-up expenses is that the cumulative expense occurred before the business was officially opened for operations. You can choose a date reflective of that for the combined total of the start-up expenses.