At what point can you take tax deductions for businesses?
A friend and I are developing a service that we intend to market, but it will be at least one year before we are able to generate revenue.
In the meantime, my friend will be incurring a lot of costs to get this service marketable. At this point would he be able to deduct these costs from his personal income tax? Would it be necessary or helpful to form an LLC now even though we won’t have any market activity yet?
Tags: personal income tax
#1 written by waggy_33 July 27th, 2010 at 20:36
To start with I would suggest that you contact a good CPA to advise you on the form of business you should be operating as. Generally, an LLC makes sense so as to limit your liability. I think is more than worth it to consult with a CPA to get it right up front so that you get started along the right path.
The next problem you need to look at is what expenses must be capitalized as organizational expenses and what expenses qualify as start up expenses. Organizational expenses have to have an election to amortize them for tax deduction purposes. Start up expenses can be deducted up to $5,000 and then the excess would be amortized. You need to meet the definition of start up in the code and regs before you can deduct these expenses.
There is a bill pending in congress that would allow the deduction of $20,000 of start up expenses that you may want to consider.
Good luck and spend a few dollars getting good advice from the beginning.
#2 written by Bostonian In MO July 27th, 2010 at 20:36
You can’t deduct any costs until your business is actually up and running. Costs incurred now are treated as start-up costs. You can claim a portion of them in year one and then amortize the remainder over time.
An LLC is a total waste of money for the vast majority of small businesses. It unnecessarily adds to expenses, often generates higher taxes and fees at the state level, and only offers limited liability protection since the liability veil is easily pierced on a closely-held corporation.
What you SHOULD do is sit down with your respective attorneys and hammer out a formal partnership agreement. While not necessary for tax purposes, most informal partnerships degenerate into finger pointing and "he said, she said" sessions that result in collapse of the business even before it’s off of the ground.
#3 written by tro July 27th, 2010 at 20:36
when you actually are ‘open for business’
the expenses you incur getting ready to do business are preopening expenses and amortized over 120 months(except a provision for a one time up to $5000 write off immediately)
and for the LLC, don’t bother until you find this is truly a profitable enterprise, there are costs incurred to establish an annual minimum tax regardless of profit and more complication tax reporting
go to http://www.irs.gov and request publication 334 to help you