Multi-Year Startup Costs With Website

[DRB]

In October of 2023 I began incurring start-up costs for a business that will involve on-line sales of third-party products via a website.  I have research costs and regular organization costs of approximately $2,500 that will be incurred before 12/31/23.  I also must pay a third-party to develop my website.  That cost will be approximately $5,000.  I will own and administer the website once it is available; at that point the contractor is out.

If these payments are all made before 12/31/2023, but the website isn't operational before January 1, 2024, what can I deduct for 2023?  Is the website developer contractor fee an expense, an amortizable start-up cost or a depreciable asset (the website that results)?  If it's a depreciable asset, is it available for Sec. 179 treatment?

If I must defer deductions of whatever sort until 2024, how will these costs be treated if the business doesn't make sales or doesn't turn a profit?

Many thanks for you help!

David Brown

[Opus 17]

If you business is not up and running (as an ongoing trade or business) in 2023, then you don't file a business tax return for 2023 (schedule C for most people, but you don't say how the business will be structure.)

Hold on to your startup costs, you will deduct them when you file a tax return for the first year the business is active.  Assets are depreciated in the usual way.  Startup expenses can be deducted in full the first year if they are less than $5000.  If your total startup costs are more than $5000, they are partly deducted in the first year and partly deducted over 15 years, according to a formula.  

[DRB]

Thank you for your reply, I very much appreciate it.  I do want to drill down a little bit further, if you'll allow.

First, the business will be structured as an LLC.  I already have a few and am familiar with the filings for regular operations.  (I'm a retired CPA myself, though not from a tax practice.).  This will be, though, the first business I've built and owned that has a website that's a key part of the business.  I may have to pay the contractor at least half the $5,000 cost to develop the site in the month of December.  If possible I'd postpone all payment to the contractor until January 2024.

If I did delay the total payment and deployed the website in 2024, would I treat that cost as a startup cost to be amortized, a single payment to a contractor to be expensed on Schedule C, or could I take a Sec. 179 deduction?  If I have to pay half the cost in 2023, does that portion of the cost become startup cost, will the remaining amount also be part of the startup cost, or will I have options to handle the two payments differently?

Again, thank you very much for help.  I appreciate it very much!

David

[Opus 17]

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@DRB wrote:

Thank you for your reply, I very much appreciate it.  I do want to drill down a little bit further, if you'll allow.

First, the business will be structured as an LLC.  I already have a few and am familiar with the filings for regular operations.  (I'm a retired CPA myself, though not from a tax practice.).  This will be, though, the first business I've built and owned that has a website that's a key part of the business.  I may have to pay the contractor at least half the $5,000 cost to develop the site in the month of December.  If possible I'd postpone all payment to the contractor until January 2024.

If I did delay the total payment and deployed the website in 2024, would I treat that cost as a startup cost to be amortized, a single payment to a contractor to be expensed on Schedule C, or could I take a Sec. 179 deduction?  If I have to pay half the cost in 2023, does that portion of the cost become startup cost, will the remaining amount also be part of the startup cost, or will I have options to handle the two payments differently?

Again, thank you very much for help.  I appreciate it very much!

David

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As best I understand it, you don't file a schedule C if the business is not "ongoing", so you save your startup costs for the first year you file a schedule C.

A startup cost is a cost that "a business pays or incurs before the day their active trade or business begins", so whether you pay your developer in 2023 or 2024, that's a startup cost.  I will admit to being puzzled by "pays or incurs" since cash based businesses usually based their accounting on when a cost is paid.  But elsewhere, the IRS just says "incurs".  

https://www.irs.gov/newsroom/heres-how-businesses-can-deduct-startup-costs-from-their-federal-taxes

https://www.irs.gov/publications/p583

https://www.irs.gov/publications/p535#en_US_2022_publink1000208919

A web site appears to be considered an asset most of the time, see here for example.

https://quickbooks.intuit.com/learn-support/en-us/reports-and-accounting/web-design-an-asset-or-an-e...

In that case, you list the development costs as part of the cost basis of the asset.  Once the asset is placed in service, you would depreciate it.  I don't think a custom web site is eligible for section 179 although I could be proven wrong.  It's also not eligible for the tangible property safe harbor because it is not tangible property.  I think you just depreciate the web site over it's expected useful life or its class life, whatever that is.

The payment to the contractor is still subject to the issuance of a 1099, but it would not be a regular expense, but an expense toward building the web site as an asset (like issuing a 1099 to a contractor who was building a physical office building). 

Other startup costs would be deductible up to $5000 in the year you being actively engaging in the business.