Abstract: Despite a seemingly endless period of COVID-19 setbacks, last
year the country experienced a large increase in new businesses launched. The
latest figures available from the U.S. Census Bureau (June 2020 through June
2021) show that business applications rose 18.6%. Entrepreneurs
often don’t know that many of the expenses incurred by start-ups can’t be
currently deducted. This article discusses how the handling of initial expenses
can affect a new business owner’s federal tax bill.
How
start-up costs of a new business affect your tax return
Despite
the COVID-19 pandemic, government officials are seeing a large increase in the
number of new businesses being launched. The latest data available from the
U.S. Census Bureau shows that for the period of June 2020 through June 2021,
business applications were up 18.6%. The Bureau measures this by the number of
businesses applying for an employer identification number.
Entrepreneurs
often don’t know that many of the expenses incurred by start-ups can’t be
currently deducted. You should be aware that the way you handle some of your
initial expenses can make a large difference in your federal tax bill.
How
to treat expenses for tax purposes
If
you’re starting or planning to launch a new business, keep these three rules in
mind:
Be sure to keep detailed records and
receipts for these costs, so that nothing falls through the cracks.
Eligible
expenses
In
general, start-up expenses are those you make to:
To
qualify for a special election, an expense also must be one that would be
deductible if it were incurred after a business began. One example is money you
spend analyzing potential markets for a new product or service.
To
be eligible as an “organization expense,” an expense must be related to
establishing a corporation or partnership. Examples of organization expenses include
legal and accounting fees for services related to organizing a new business and
filing fees paid to the state of incorporation.
Plan
now
If
you have start-up expenses that you’d like to deduct this year, you need to
decide whether to take the election described above. Recordkeeping is critical.
Contact us about your start-up plans. We can help with the tax and other
aspects of your new business.
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