Re: Software as a Service Company Deductions
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Level 2

Re: Software as a Service Company Deductions

Hi, I am a startup. My company builds CRMs (Software as a Service).

 

1) My first year I incurred 10k startup costs (2018)

2) Second year 2019: I incurred $15k costs which included hiring software developers to build my platform.  Second part of 2019 I had a soft launch and began signed up subscribers but haven't charged them yet because the software has bugs. Which part do I file the startup costs (amortized) and which part can I deduct dollar for dollar? Does software companies have different sets of tax rules? I'm in Seattle, WA

 

Can someone help or point me to an accountant or anything? 😄 THANK YOU

7 Replies
Employee Tax Expert

Re: Software as a Service Company Deductions

No, software companies do not have a different set of tax rules.

 

Business Start-Up and Organizational Costs

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 8.

Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. 

 

Qualifying costs. 

A start-up cost is amortizable if it meets both of the following tests.

  • It is a cost you could deduct if you paid or incurred it to operate an existing active trade or business (in the same field as the one you entered into).
  • It is a cost you pay or incur before the day your active trade or business begins.

Start-up costs include amounts paid for the following.

  • An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
  • Advertisements for the opening of the business.
  • Salaries and wages for employees who are being trained and their instructors.
  • Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
  • Salaries and fees for executives and consultants, or for similar professional services.

Nonqualifying costs. 

Start-up costs Don't include deductible interest, taxes, or research and experimental costs.

 

Organizational costs include the costs of creating a corporation or partnership.

 

Examples include:

- The cost of temporary directors

- The cost of organizational meetings

- State incorporation fees

- The cost of legal services

 

 

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Level 2

Re: Software as a Service Company Deductions

Thank you SO much for your time. I really appreciate it. 

 

So if in 2019 I did a soft launch and began to sell my services but lost money can I take my losses as part business expenses or no?  Thank you

Level 15

Re: Software as a Service Company Deductions

Basically, start up costs are deducted in the first tax year the business is "open for business". It does not matter in what year those costs were incurred either, or if those costs span over a few years prior to the "open for business" date.

The only costs that are not deductible as start-up expenses are business assets. While an asset may have been purchased in a prior year, that asset gets capitalized and depreciated over time, and depreciation doesn't start until the asset is placed "in service" in the business. Additionally, the in service date of an asset can not be before the business is "open for business".

If you have already hired employees (W-2) and they are working for you, then the first day the first employee showed up for work on the clock, you were "Open for Business".

This is not always true (though it usually is) for 1099-MSIC contract labor.

 

 

Level 2

Re: Software as a Service Company Deductions

Hi Carl thank you very much for responding. I hired software developers who I had to submit 1099s to. Does this then count as being 'open for business'? Does that mean that I can deduct dollar for dollar the loss I incurred this year for the business? Thank you

Level 2

Re: Software as a Service Company Deductions

Hi Carl thank you very much for responding. I hired software developers who I had to submit 1099s to. Does this then count as being 'open for business'? Does that mean that I can deduct dollar for dollar the loss I incurred this year for the business? Thank you

Employee Tax Expert

Re: Software as a Service Company Deductions

In one of your earlier posts you stated that you began to sell your services.  To me, that means you were open for business more than the point where you hired software developers.  Expenses that you incurred after you began to sell your services would be considered business expenses, not start-up costs.

 

@connie-uy

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Level 2

Re: Software as a Service Company Deductions

Really appreciate you time. THANK YOU

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