Start Up Cost for LLC

[timothydlang]

We are looking to create an LLC in January 2023. Will we be able to deduct the start up cost if they incur in December 2022? For example, website, adverting, etc or does that all have to be completed starting January ‘23?

Thanks

[Anonymous_ · Accepted solution]

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

See also https://www.irs.gov/publications/p535#en_US_2021_publink1000208919

[Opus 17]

Generally speaking, start up costs that you incurred before the business is active are deducted on the tax return for the first year that the business is active. If your start up costs are less than $5000 you can deduct them as an expense; if they are more than $5000 they may be partly deducted in the first year and partly amortized over 15 years.  So start up costs from 2022 will be handled on your 2023 tax return, assuming that the business is not ongoing and active until 2023. 

This applies to start up costs that are not equipment or other assets. Assets are placed in service and depreciated in the usual manner.

[Opus 17]

I want to address something you did not ask. You said “we“ are starting an LLC.  If this is an LLC with two or more partners, you will generally be required to file a partnership tax return form 1065 and not a schedule C. However, if there are only two members and they are spouses and you live in a community property state, the tax rules are different. You may want to seek professional assistance to set up your accounting and taxes for the first year of your business. 

[Carl]

Start-up costs are claimed in the first year the business is "open for business".  It does not matter in what year those startup costs were incurred.

Start-up costs that can be claimed in that first year are limited to a maximum of $5,000. The maximum for that first year reduces if the business exceeds a certain income threshold in that first year. This is not all that common. Any remaining startup costs exceeding the maximum allowed that first year are amortized and deducted over the next 15 years of business.

The maximum allowed that first year "may" have changed for all I know. But $5K is what it was last time I looked it up.

[timothydlang]

Thanks for the reply.

First, I will be consulting a professional on the details but wanted a basic overview, which you provided and I appreciate it. 

Second, it would be my spouse and I, and it would only be two people. So I will keep that in mind when I am talking with the professional.

Thanks again @Opus 17 

[Carl]

I will be consulting a professional

That's "the" smartest move you could possibly make. Especially if your state taxes personal income. With two people, you'll have a multi-member LLC. The professional "should" make you aware that the multi-member LLC files it's own 1065 partnership tax return, and that return is due March 15th. Not April 15th like it is for the personal tax return.  They should also make you aware of the late filing penalty for a 1065 partnership return. Last I checked, is was $205 per month, per member. So with two members, file one day after the deadline and you're looking at a $410 late filing penalty.

Now there's probably no reason why you can't do this filing yourself. But perfection in that first year is not an option. It's a must. Seeking professional help that first year is probably the smartest thing you can do. Then do it yourself in later years so long as you're comfortable with it.

[Opus 17]

@Carl 

@timothydlang 

If the only members are two spouses and they live in a community property state, then it is not treated as a partnership for federal income tax purposes, it is treated as two separate schedule C businesses, one in the name of each spouse, each listing half the income and half the expenses.  This is one of those areas where a professional is very important.

[Anonymous_]

It is important to understand that the federal income tax treatment for spouses residing in a community property state and holding the entity as community property in this scenario is elective.

Per Rev. Proc. 2002-69, the IRS will accept either treatment as two separate businesses (reported on Schedule C) or a partnership (reported on Form 1065).

See https://www.irs.gov/pub/irs-drop/rp-02-69.pdf