Start-up costs incurred prior to formation of company

[Skyridgetammer]

My business partner and I recently formed a two member LLC. There were legal fees that we both incurred and I purchased a laptop and printer for the sole purpose of using for the business. We are about to open the bank account where we will both make our equal, initial cash investments. We would like to be reimbursed for the startup costs and office equipment. How should we go about this?

[M-MTax · Accepted solution]

You've got organizational costs.....section 709.....for the legal fees to set up the LLC and then the laptop and printer are assets that are deducted as expenses under section 179 or de minimis safe harbor if less than $2500 or depreciated.....the laptop and printer are not organizational or startup costs.

[Carl]

Start-up costs incurred before the business is officially open for business are deductible in the tax year the business is actually open for business. It does not matter in what tax year those costs were incurred. Startup costs are reported as startup cost and a maximum of $5,000 can be deducted in the first year the business is open for business. (Assuming the business has $5,000 of taxable business income to deduct it from.) Any excess will be amortized and deducted over the next 15 years.

Things that are not business startup costs:

Assets. Business assets are not startup costs. Basically, a business asset is anything used on a recurring basis in the production of income. This would include office furniture, manufacturing equipment and vehicles, as well as a storefront that you purchased (not rented). Business assets are reported as business assets and are depreciated over time with depreciation starting on the date that asset is placed in service. The in service date of an asset can not be before the date the business was officially open for business. It does not matter when that asset was purchased either.

Inventory. Assuming you will track inventory via COGS (Cost of Goods Sold) if your business will be selling product that it acquires wholesale or by manufacturing it, what you sell is inventory. The cost of acquiring that inventory or the materials used to manufacture it is not deductible until the tax year you actually sell that inventory. It does not matter in what tax year you acquired that inventory or the materials to manufacture it.

Take note that when using COGS, in your first year your Beginning of Year (BOY) inventory balance absolutely positively must be ZERO. It doesn't matter when you acquired that inventory either.

The rules are complex and allow for alternatives. So you would be wise to seek legal counsel. The rules for the different business types can vary widely from state to state. Going into a business endeavor of any type blindly can cost you dearly and the lack of knowledge can quite easily bankrupt your business before it even gets off the ground.