Start up costs begin the month in which the active trade or business begins (Sec. 195(b)(1)). Active conduct of a trade or business generally occurs when the business has begun the conduct of operations for which it was organized (i.e., is in a position to begin generating revenue). You need to evaluate whether this is your case or not as it is a little subjective.
Startup costs are costs paid or incurred in connection with investigating the creation or acquisition of an active trade or business or creating an active trade or business. Startup costs include amounts paid or incurred in connection with an existing activity engaged in for profit, and for the production of income in anticipation of the activity becoming an active trade or business. To be a startup cost, the expenditure must have otherwise been deductible as an ordinary and necessary business expense under Sec. 162. Link IRS rules 162 Expenditures that would have otherwise been capitalized, such as the costs associated with the construction of a capital asset, are not startup costs (Rev. Rul. 81-150).
Expenses of investigating the creation or acquisition of a trade or business are known as investigatory expenses. They are the costs incurred in searching for and analyzing prospective businesses prior to making a final decision whether to acquire an existing business, create a new business, or forgo a business transaction altogether (Rev. Rul. 99-23). These costs may relate to a category of businesses or to a particular business. They may be treated as deductible/amortizable startup costs only if they would be currently deductible by an existing trade or business in the same field. Deductible investigatory expenses include costs incurred for the analysis or survey of potential markets, products, labor supply, and transportation facilities.
Expenses of creating an active business are costs incurred after the investigatory process has determined that a particular business should be acquired or established but before the business actually begins operations. Here is a sample list of items to include:
- Advertising costs;
- Salaries and wages paid to trainee employees and their instructors;
- Travel and other expenses incurred in lining up prospective distributors, suppliers, or customers; and
- Salaries or fees paid or incurred for executives, consultants, and professional services.
Other startup expenses might include:
- Business investigation expenses such as surveys, market studies, and consultants' fees;
- Preopening advertising and promotional efforts;
- Travel and entertainment (for efforts to find a location, to secure suppliers or customers, etc.);
- Salaries, employee benefits, insurance, and overhead;
- Preopening repair and maintenance of capital assets to be used in the business;
- Mortgage standby commitment fees to ensure financing for the new venture;
- Accounting and legal fees that are not organizational costs;
- Employee training;
- Rent and utilities for space maintained in the preopening phase; and
- Costs of expanding an existing business or beginning a new business if a new entity is used.
Can I Treat depreciation as a startup cost
Although the cost of depreciable property cannot be treated as a startup expense, no clear guidance exists as to whether depreciation can be calculated and treated as a startup expense. Rules require you begin depreciating when the asset is put into "service"
The courts have generally held that the depreciation deduction allowance starts when the intended business begins (Simonson, 752 F.2d 341 (8th Cir. 1985); McManus, T.C. Memo. 1987-457).
I believe it all goes back to the first question has your business begun activity?
I hope that helps.
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
