Are startup costs deductible?

[BellaAmar]

Hello,

Fist of all, thank you for your time and support. I run a single owner LLC and haven't paid self-employment tax yet. I've got some questions to clarify:

1. I'm unsure that if I can still write off my startup expenses from my gross income. They're tax deductible, right?
2. What if I include some tools (construction) and printers that I use for my business, but no receipt to show? (bought some of them months or years ago before I start the business).  How can I write off them from my business income? 
3. If I choose to use cash method, then I can't include depreciation (as expenses, right? Which is the best way for a small business? 
4. Can I deduct my employee's car expenses (loan pmt; maintenance costs; gas, etc.) that are used for almost 100% business purposes?
5. We're no longer allowed to deduct tax preparation cost (turbotax live assist fee, etc.) as expenses, right?

Thank you so much!

[Sean Enrolled Agent · Accepted solution]

Hello, great questions!

1. I'm unsure that if I can still write off my startup expenses from my gross income. They're tax deductible, right?

Startup expenses are usually taken as an expense for the first year that the business is filing a tax return. When you complete your schedule C, you will have the option to deduct start up expenses.
Please feel free to refer to the following IRS website for more information about how a business can deduct their startup costs.
https://www.irs.gov/newsroom/heres-how-businesses-can-deduct-startup-costs-from-their-federal-taxes 

What if I include some tools (construction) and printers that I use for my business, but no receipt to show? (bought some of them months or years ago before I start the business).  How can I write off them from my business income? 

You will want to make sure that you are keeping accurate receipts and records for any items that are purchased for your business. The tools and printers should be included in the year in which they were first used for your business.

If you purchased something before you began setting up your business that you're now using for your business, you will end up depreciating the item based upon the fair market value of the item for when your business actually began.

 If I choose to use cash method, then I can't include depreciation (as expenses, right? Which is the best way for a small business? 

If you choose to use the cash method, you can still include depreciation for items that have a life of more than one year. 

What can be depreciated over time and what can be expensed in one year can be a tricky issue, so feel free to review the following websites for more information:

https://ttlc.intuit.com/turbotax-support/en-us/help-article/expense-accounting/depreciation/L574TV1s... 

https://turbotax.intuit.com/tax-tips/small-business-taxes/depreciation-of-business-assets/L4OStLQEL 

Can I deduct my employee's car expenses (loan pmt; maintenance costs; gas, etc.) that are used for almost 100% business purposes?

If you are talking about car expenses that you use for your business, yes you can expense those items. The vehicles would need to be vehicles that you purchased and are using in your business.

The deduction for using vehicles in your business can sometimes be significant, so it's important to make the following decisions:

• Is it better to use the standard mileage rate as your deduction or the actual expenses incurred for a vehicle used for this business?
• Who should own the vehicle? The business, the business owner or the employee?
• Should the business buy or lease the vehicle?

We're no longer allowed to deduct tax preparation cost (turbotax live assist fee, etc.) as expenses, right?

 
You can only claim the amount of the fee that was accrued by preparing the business portion of your taxes. 

[Anonymous]

Hello BellaAmar,

Thank you for participating in the Ask the Experts event. As to your questions:

• Yes, you can write off your startup expenses. Some of those expenses may need to be amortized. See Startup Business Tax Tips for some more guidance.
• Generally, you can only deduct expenses in the year you incur that expense, meaning if you purchased tools and equipment in years prior they are not deductible in a later year. However, donating those tools and equipment to the business will increase your basis in the business as if you contributed cash to invest in the business.
• You can still, and sometimes must, depreciate certain assets even if you operate on a cash basis.
• Since your employee's car is not your car or the business's car, you can reimburse your employee for whatever expense you agree upon, but don't list it as an asset on your books unless he donates it or you purchase it.
• We are no longer able to deduct tax preparation costs if you itemize your personal deductions. As a business expense, tax preparation and other professional fees are perfectly fine to deduct.

I hope that helps.

[DashonnonH]

Hello there @BellaAmar You're welcome. A pleasure to assist.

1. unsure that if I can still write off my startup expenses from my gross income. They're tax deductible, right?

Business startup and organizational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business startup and $5,000 of organizational costs paid or incurred after October 22, 2004.

The $5,000 deduction is reduced by the amount your total startup or organizational costs exceed $50,000. Any remaining costs must be amortized.

Ex. If your startup cost are $52,000. You can only deduct $3000 in the current year. the other $49,000 will be amortized Amortized is the of start up costs that cannot be deducted currently will be divided and deducted over a 180-month period. If over $55000. All startup cost will be amortized over the 180 months. 

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

Startup cost resource

https://turbotax.intuit.com/tax-tips/small-business-taxes/startup-business-tax-tips/L7SOyYMzr

2. What if I include some tools (construction) and printers that I use for my business, but no receipt to show? (bought some of them months or years ago before I start the business).  How can I write off them from my business income? 

If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. 

Basis for depreciation.

The basis for depreciation is the lesser of the following amounts.

• The FMV of the property on the date of the change, or

• Your adjusted basis on the date of the change.

Once you have the basis for depreciation you would depreciate the asset over the proper amount of years for the item. These items would not qualify for 179 deduction or any special depreciation.

The IRS does require supporting documents and supporting information, recorded by taxpayer. If you do not have this documentation, the IRS may not allow you to deduct these items.

Assets are the property, such as machinery and furniture, that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to compute the annual depreciation and the gain or loss when you sell the assets. Documents for assets should show the following information:

• When and how you acquired the assets
• Purchase price
• Cost of any improvements
• Section 179 deduction taken
• Deductions taken for depreciation
• Deductions taken for casualty losses, such as losses resulting from fires or storms
• How you used the asset
• When and how you disposed of the asset
• Selling price
• Expenses of sale

[BellaAmar]

Thank you all for taking time and answering my questions! Good luck!