Form 1065 - startup costs or operational costs?

[theleeb]

Hello, I am one of two partners for an LLC business that started in mid-February 2023.

We incurred expenses such as salon chairs, hair products, painting, hair styling equipment (e.g., hair dryers and other gadgets), signage for the business, etc., in preparation for opening day.

We also had to obtain a license from the state and pay a fee to set up the LLC

Would these be considered largely operating expenses (e.g., not startup costs which would otherwise be capitalized)?  I am guessing the state fees might be organizational costs?  The combined cost is about $3,000.

I am not clear on where to put these costs on Form 1065.  Any assistance would be appreciated!

[Mike9241]

if you're stating that all the costs equipment, organization fees, etc in total cost less than $5000, it doesn't matter whether they're treated as start-up costs or something else. That's because IRC 195, which deals with start-up costs, allows you to expense 100% the first year if the total is less than $5000.01.

difference of opinion probably exist as to which of your costs would be start-up and which would be deemed post star-up

the state fees to register the LLC and the signage (maybe) to me would be start-up

annual state fees for the LLC would be licenses and taxes

the equipment would be expensed as small tools and equipment

painting as repairs and maintenance (maybe start-up)

the hair products as supplies.  

This is from Turbotax

For example, if you’re opening a landscaping business and you buy a truck, typically you have to depreciate the cost. (There is a de-minimus exception for items costing less than $2500 - they can be expensed) Such expenses are treated just the same as they would be if you had been operating your business for decades.

Timing can be important
Timing matters, too. “Start-up costs are only deductible if your business does indeed start up,” says Capelli. “And they have to be incurred during the planning and development phase of your business. Otherwise, after that, they become operating expenses.” The flip side to this is that even though your business isn’t operational yet when you incur start-up expenses, you can deduct them or begin to deduct them in your first year of business.

[theleeb]

Helpful feedback, thank you.  A follow up question....

Where would "supplies" be reported on the 1065?  Or would it be reported as "Purchases" on Form 1125-A, COGS?

I do not see a category labeled "startup"...so it seems I would align the cost category as you outlined in your reply?   I see Line 14, Taxes and licenses and Line 11, Repairs and maintenance.   However, I do not see a line for "small tools and equipment".

Last question - most income is from services.  But some hair products are sold as well.  Is it possible to expense these as supplies without having to carry inventory on the books?

Thanks.

[LeticiaF1]

Any expenses that you do not see categories for on page 1 of Form 1065, can be included in line 21 under Other Deductions. You could include supplies and small tools and equipment there.

Start-up cost usually include the costs of training staff, legal fees and establishing vendors and suppliers, advertising in anticipation of your opening, and organizational expenses.  As Mike9241 mentioned, you can claim the expense on the year you start your business, or you can choose to amortize them and spread the expense over more years.  For more information about start-up expenses, refer to the following article:

Start-up Business Tax Tips

Regarding the sale of products, you can report the cost of your products as supplies as long as your business had annual sales for the last three tax years average out to $26 million or less per year, and you use the cash method of accounting. For more information on inventory see TurboTax help article below.

Do I need to report inventory?

As always, feel free to reach back if you have additional questions.

@theleeb