Tax-Saving Strategies for Start-Up Businesses

Starting a business has many inherent costs.
This article is about comparing creating a new business versus buying a new business/expanding your current business.

The tax code states that start-up expenses arise when you spend money to:

  • investigate the creation or acquisition of an active business,
  • create an active business, or
  • engage in a for-profit or production of income activity before the day on which the active business begins, in anticipation that such activity will become an active business.

The expenses can include:

  • Travel expenses to gain knowledge from others already in the business
  • Entertainment expenses to pick the brains of friends and business acquaintances
  • A host of training costs
  • Certain automobile expenses
  • Long-distance, investigatory telephone calls

To qualify as a start-up expense, said expense must be both:

  1. a cost that you could deduct as a business expense if the business already existed, and
  2. a cost incurred before your business begins.

Here are additional expenses that can qualify as start-up expenses:

  • Money paid for potential market, labor supply, transportation, or product surveys or analyses
  • Advertising expenses incurred prior to opening
  • Wages paid before opening to your new employees and their trainers
  • Costs incurred to secure distributors, suppliers, and customers
  • Fees paid to consultants and other professionals

Qualifying organizational costs are generally those paid to create the corporation. To qualify, the cost must be

  • for the creation of the corporation;
  • chargeable to a capital account;
  • amortized over the fixed life of the corporation, if any; and
  • incurred before the end of the first year of business.

Common examples include the following:

  • Legal and accounting services
  • State incorporation fees
  • Temporary director expenses
  • Costs of organizational meetings.

Finally, you can also amortize organizational costs in the same manner, and to the same degree, if you form your new business as a partnership. The requirements are similar, with the cost qualifying only if it is:

  • for the creation of the partnership;
  • chargeable to a capital account;
  • amortizable over any fixed life of the partnership; and
  • incurred by the due date of the partnership’s first tax return.

Tax-Saving Strategies for Start-Up Businesses

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