How entrepreneurs must treat expenses on their tax returns

This article organizes the original guidance on how entrepreneurs must treat expenses on their tax returns into clear sections for easier reading and reference.

Overview

This opening section presents the main context from the original post.

Have you recently started a new business? Or are you contemplating starting one? Launching a new venture is a hectic, exciting time. And as you know, before you even open the doors, you generally have to spend a lot of money. You may have to train workers and pay for rent, utilities, marketing, and more.

Entrepreneurs are often unaware that many expenses incurred by start-ups can’t be deducted right away. You should be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.

Key points on how expenses are handled

This section keeps the original guidance focused on key points on how expenses are handled.

When starting or planning a new enterprise, keep these factors in mind:

1. Start-up costs include those incurred or paid while creating an active trade or business—or investigating the creation or acquisition of one.
2. Under the federal tax code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
3. No deductions or amortization write-offs are allowed until the year when “active conduct” of your new business commences. That usually means the year when the enterprise has all the pieces in place to begin earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Has the activity actually begun?

Examples of expenses

This section keeps the original guidance focused on examples of expenses.

Start-up expenses generally include all expenses that are incurred to:

• Investigate the creation or acquisition of a business,
• Create a business, or
• Engage in a for-profit activity in anticipation of that activity becoming an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example would be the money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the outlay must be related to the creation of a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing the new business and filing fees paid to the state of incorporation.

An important decision

This section keeps the original guidance focused on an important decision.

Time may be of the essence if you have start-up expenses that you’d like to deduct this year. You need to decide whether to take the elections described above. Recordkeeping is important. Contact us about your business start-up plans. We can help with the tax and other aspects of your new venture.

Related Resources

These resources connect the article topic with related Bowers service pages and approved professional reading.

• Tax Services
• Client Accounting & Advisory Services
• Business Strategy & Growth
• Mergers & Acquisitions
• Harvard Business Review
• Accounting Today

FAQ

The questions below summarize the main points already covered in the article.

What is the main focus of How entrepreneurs must treat expenses on their tax returns?

The article focuses on how entrepreneurs must treat expenses on their tax returns and organizes the original guidance into sections for easier review.

What topics does the article cover first?

The article begins with key points on how expenses are handled and then continues through the remaining points in the original post.

Which additional areas are included?

Additional sections include examples of expenses, an important decision.

Does the post include action items or reminders?

Yes. The original post includes listed items that have been kept in list format for easier scanning.

Was the original post wording changed?

The revision keeps the author wording and updates the structure so the post is easier to read online.