Start-Up Expenses

[smcguire33]

I have done a lot of research on start-up expenses, including reading the code, but am having a hard time confirming one basic thing:

Do start-up expenses include all expenses incurred before the business is operational?

I see many examples, but never see the ones I am trying to confirm, like rent, architect expenses, engineer expenses, legal fees associated with zoning, etc. Should I just assume that all of these expenses are start-up expenses because they occurred before I opened my doors?

Thanks so much for your help as this has been bothering me for awhile.

-Sean

[Bsch4477]

Read this for an authoritative discussion. 

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

[smcguire33]

Appreciate the help! I actually did come across this article in my prior research. I still can't tell whether every expense prior to opening is a start-up expense or if start-up expenses are limited to those few items the IRS directly calls out.

[Opus 17]

@smcguire33 

Business expenses are those expenses that are ordinary and necessary for the kind of work involved. Ordinary means usual or customary for that line of work. Necessary means necessary for that kind of work, although necessary does not mean essential or indispensable.  The type of expense obviously varies depending on the kind of work being done. If you are starting an independent software coding business, you need a computer and an Internet connection and advertising and maybe a website. If you are starting a landscaping business you need tools and a dump truck and so on.

A start up expense is simply an expense that occurs before the business is active. The definition of an expense is the same, ordinary and necessary.  With the caveat that assets, which is usually defined as durable items with an expected life of more than one year, must be placed in service as assets in the usual manner and are not treated as expenses, unless they fall into one of the safe harbors.

[smcguire33]

That is hugely helpful, Opus. So I will treat all ordinary/necessary expenses (architect, engineer, legal) before doors open as start-up expenses for tax purposes. 

The follow-up to that question - I should not recognize these expenses until I am operational, correct?

Thanks!

-Sean

[Opus 17]

@smcguire33 

if your start up expenses are less than $5000, you can deduct them on the first year that business is active and you file a schedule C. If the amount is more than $5000, then the expenses may be partly deducted in the first year, and partly amortized over 15 years. There is a formula which takes into account the total amount of the start up expenses and your other business income, and I don’t have that formula handy, but I’m sure you could look it up or TurboTax will automatically do it for you when you file your first schedule C. 

[smcguire33]

Perfect. So if I have amassed quite a few start-up expenses in '21 & '22 but will not open until '23, should I just be filing a zero return for '22?

[Opus 17]

@smcguire33 

If the business is not yet active, you don’t file any return for it.