We all love to bash the IRS (in many cases they deserve it), but crazy tax rules come from Congress, the IRS just enforces them. So today, let’s blame Congress for the complex rules surrounding startup costs.
Startup expenses are certain costs you incur before a new business or rental operation begins. Unlike operating expenses for an existing business or rental, startup expenses can’t automatically be deducted in a single year, because the money you spend to start up a rental or business is considered a “capital” expense. (“Capital” means you get benefits for more than one year.)
Startup expenses are those that would be deductible if incurred by an active trade or business. There are two broad categories: (1) investigatory expenses (incurred as part of a general search to determine whether to acquire or enter a new business or purchase a new rental property) and (2) preopening costs (advertising, office expenses, salaries, insurance, utilities, taxes, licenses, maintenance costs, etc.)
Expenses to actually acquire a business or rental property (appraisal fees, inspection fees, architectural, engineering, environmental costs, document preparation, professional assistance in negotiations, costs to obtain permits, conveyance costs, commissions, etc.) are considered part of the purchase price of such and are added to the depreciable costs that are treated altogether under different rules.
The cost of expanding an existing business is a business operating expense, not a startup expense. Purchase of regularly considered capital assets such as land, building, equipment, etc. are not considered startup. They are depreciated over their tax defined useful lives.
For most folks, the first “tier” of deduction for startup costs is about all they will incur. You can deduct up to the first $5,000 of startup costs in the year you start the business or rental.
The next “tier” is $50,000. You amortize the amount over $5,000 up to $50,000 over 180 months. (15 years).
It starts to get strange after that. Any amount over that $50,000 reduces the immediate deduction of the first $5,000. If your startup costs exceed $55,000, you will get no immediate deduction for any startup costs, all are to be amortized over 15 years.
Thankyou Congress for making such a mess out of a simple concept. Part of the blame falls on greedy folks in the past who tried to deduct everything they could as “startup expenses” prompting the IRS to run to Congress and ask for more rigid rules. There, I just managed to bring the IRS back in as a co-conspirator in all this mess.
Have you heard? Psalm 119:134 says, “Redeem me from man’s oppression, that I may keep your precepts.”
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