I started my LLC in 2017 but I have expenses from around 2014 and maybe even further back I made for the startup. Can I claim these expenses still?

[Anonymous]

This will be my 1st year filing taxes including the single member LLC. I started the LLC in 2017 but I have expenses from around 2014 and maybe even further back for the start up. Majority of these are computers, equipment, and monthly subscription services strictly for business purposes. Prices range anywhere from $10 to $5000 for the items and the company did generate revenue in 2017 after starting, nothing before that.

Since this is my first year filing, if there are any helpful checklists or things to look for when filing, i'd love to know. Thank you

[LauraVF · Accepted solution]

YES. You can claim those expenses.

The IRS classifies business expenses incurred before the "start of business" as capital expenses and capital assets (computers, equipment, land, furniture, etc.) You have to treat these costs in the following manner:

Capital assets: amortize the assets and recover the costs through annual depreciation.
 
Capital expenses: different treatments are available. 

• Identify expenses as "start-up costs".
  These are the costs incurred creating an active trade or business or investigating the creation or acquisition of an active trade or business. For example,  advertisement for the opening of the business,  salaries/wages of employees in training, and many others.
   
• Identify expenses as "organizational costs".
  These are the costs incurred to create the business such as state incorporation fees and legal fees related to incorporation.

 Treatment options:

1. Deduct a limited amount of start-up and organizational costs in the first year of filing a return.
   Limitation: $5,000 of business start­up and $5,000 of organizational costs paid or incurred after October 22, 2004.
   The costs that are not deducted currently can be amortized over a 180 ­month period. The amortization period starts with the month you begin operating your active trade or business. You are not required to attach a statement to make this election.

OR

1. Forgo to deduct part of the start-up and organizational costs, and amortize them instead.
   You must complete and attach Form 4562 to your return for the first tax year you are in business. You also may be required to attach an accompanying statement that contains the following information:

• A description of the business to which the start­up costs relate.
• A description of each start­up cost incurred.
• The month your active business began (or was acquired).
• The number of months in your amortization period (which is generally 180 months)

Note: The election to either amortize start­up or organizational costs is irrevocable and applies to all start­up and organizational costs that are related to the trade or business.

For more information on how to amortize your costs, please see chapter 8 in publication 535. 

Publication 535, by the IRS.

Recommended readings for small businesses, also by the IRS. It links to all publications that may apply to a small business.

[sannette2009]

Hello, is the above answer still valid in 2019 and how far back can one claim for?

[viktoriyab11]

You can write off a wide variety of business expenses you paid during the year or year used/consumed.

Reporting Self-Employment Business Income and Deductions https://turbotax.intuit.com/tax-tips/self-employment-taxes/reporting-self-employment-business-income...

Deducting Business Expenses https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses

[re2boys]

See this article:  https://www.bizfilings.com/toolkit/research-topics/managing-your-taxes/federal-taxes/startup-costs-a...

Since it appears that your business didn't "open its doors" until 2017, any capital equipment purchased before the start of the business is considered a personal expense until "put in service" at the start of the business and depreciated as used equipment.  The monthly subscription service, if used to help investigate the viability of starting the business would be a start up expense.

[irunlikeataxgurl]

@LauraVF  @sannette2009     This is actually the best answer. And personally-owned equipment placed in service in the year the business begins is valued at fair market value (FMV) (i.e., what would a used computer sell for on eBay, Craigslist, etc.)  You would enter it as a journal entry with the debit going to office equipment and the credit going to equity.  If you wanted to deduct expenses paid in 2014, you would have to go back and ammend tax returns for those years, but since you didn't start your LLC until 2017, those expenses from 2014 likely wouldn't qualify.

[Carl]

Expenses incurred before a businesss is "OFFICIALLY" open for business are referred to as start-up expenses. It *does* *not* *matter* in what year those startup expenses were incurred. But you can't claim those start-up expenses until the first year the business is "officially" open for business.  But understand that there is a difference between startup expenses, and asset expenses.

Any type of equipment purchased for the business that is used on a recurring basis for the production of income by that business, is a business asset. It gets entered in the Business Assets section and depreciated over time. Depreciation starts on the first day the business is "officially" open for business, or the first day that peice of equipment is placed "in service" in the business. The "in service" date can not be before the date the business is "officially" open for business. There are no exceptions.  Depreciation of a business asset starts the date that asset is placed "in service", and *NOT* on the date you purchased it.

It is not uncommon for some businesses to have start up expenses dating back 3 years (give or take) before the business is actually open for business. But if audited, make sure you have the receipts and any other necessary paperwork to prove (in a court of law if necessary) that the equipment was purchased for the business, and was "NEVER" used for anything else between the time you purchased it, and the date you placed it in service.

When it comes to business assets, you may find it helpful to educate yourself on the difference between Section 1245 property, and Section 1250 property.

[bk019]

I have another question related to this: my LLC was approved Aug 13, 2020 but I started operations the month prior and my first payment to contractors occurred on July 31 2020. These costs weren't clearly related to setting up my business (like buying computers/equipment), they were more so regular business operations. Do I report this first payment in their 1099-NEC's for their work for the year, or should I detract it since it was before incorporation? 

[irunlikeataxgurl]

The 1099-NEC is based on the calendar year and should be issued regardless of how the entity is set up. If you were operating a business, those payments need to be reported to your subcontractors. For simplicity's sake, if it were me or my client, I would issue those 1099-NEC's under the tax id number of the newly formed LLC.

P.S. Be sure to open a new checking account tied to the new tax ID number or, if your bank allows, retitle the account under the new LLC name and tax ID number.

[Anonymous]

What qualifies as "start of business"? Is that getting a EIN? Or when income first starts?

[DawnC]

It is when you are officially ''open for business'' or operational.   That can be before you get an EIN and would be before you receive any income.   If you are operating or doing work, your business has started.   The date matters when talking about start-up costs.    Start-up costs are incurred before your business starts, but these costs are not deductible until the year in which you are officially open for business.   Some of those costs may need to be amortized.   Examples are costs of training staff, legal fees and establishing vendors and suppliers.

expenses incurred during the planning and development phase of your business = start up costs

expenses incurred after start of business = operating expenses

Startup Business Tax Tips    @Anonymous

[christiwhit]

I have a question myself. I formed my LLC in January of this year. However, I have business expenses dating back to last March 2021. Can I write them off on my taxes this year? 

[MaryK4]

When starting a business, owners should treat all eligible costs incurred before beginning to operate the business as capital expenditures that are part of their basis in the business. Generally, the business can recover costs for assets through depreciation deductions.

For costs paid or incurred after September 8, 2008, the business can deduct a limited amount of start-up and organizational costs.  They can recover the costs they cannot deduct currently over a 180-month period. This recovery period starts with the month the business begins to operate active trade or as a business.

@christiwhit [Edited 2/9/22 I 6:17 pm PST]

[irunlikeataxgurl]

I would read this thread to get your answer. I think if you reread, you will find your answer there. The $5,000/$5,000 rule applies regardless of your dates. If the startup expenses fall in the same year or the prior year that your business began, you still apply the rule.

[irunlikeataxgurl]

@chriswhit it doesn't matter if you are cash or accrual basis, the rules regarding start up expenses apply.