Good morning. My partner and I started a manufacturing business in 2019. We incorporated and elected S-corp status. We started buying equipment and parts, and spent money on marketing, professional fees, samples and a little bit of travel. Now it's time to file our first tax return, and I'm not sure what I can expense. I have equipment to depreciate and parts in my inventory, so does everything else fall under organization and/or start up costs that are subject to the $5k limit and have to be amortized over 15 years? Is there anything I can expense right up front? Thank you for any help. Monty
USA Start-Up Costs vs. Current Expenses (first year)
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Werner Reisacher
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IRS 2019 PUBLICATION 535 deals with these issues in Chapters 7 and 8.
If you still have some questions, please come back.
If you still have some questions, please come back.
Thank you for the information. I had reviewed Pub 535 but didn't see (or understand) the answer to my question. I think I can be considered to have "begun" business on October 12, 2019 because that's the day I started purchasing operating assets that are required for production. Does that mean that any expenses incurred before that date are considered start up costs and expenses on or after that date are deductible in 2019? I don't know if I'm making this more confusing that it has to be.
Werner Reisacher
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Monty,
It's not you who makes this topic confusing, the issues related to "start-up" costs are complex.
Start-up costs are cash you spent before you opened your business.
Expenses:
in the first year, you can expense $ 5 K as business start-up costs and $ 5K as organizational costs related to the setting up of your business.
Expenses that exceed these amounts must be capitalized and written off over 5 years. The total amount of such expenses are limited to $ 50K
If it does not make sense to expense the $ 10 K during the first year, you have the option to spread those costs over a longer period by filing IRS Form 4562.
Tangible assets:
In addition to money spent on expenses prior to opening the business, you probably also spent money on some machinery, spare parts, and other tangible assets that have economical value and could be classified as inventory or fixed assets. You could use those assets and bring them as your or your partners' personal property into the company in the form of a capital contribution. Debit: Inventory/Fixed Assets Credit: Shareholder Capital/or Shareholder Loan if you expect the company to be able to eventually reimburse you.
Whichever way you go, I highly recommend you get in touch with a professional who is experienced in handling tax issues. You should concentrate your time on getting your business going and avoid to have to spend time and money at a later date.
Stay safe and good luck with your venture.
It's not you who makes this topic confusing, the issues related to "start-up" costs are complex.
Start-up costs are cash you spent before you opened your business.
Expenses:
in the first year, you can expense $ 5 K as business start-up costs and $ 5K as organizational costs related to the setting up of your business.
Expenses that exceed these amounts must be capitalized and written off over 5 years. The total amount of such expenses are limited to $ 50K
If it does not make sense to expense the $ 10 K during the first year, you have the option to spread those costs over a longer period by filing IRS Form 4562.
Tangible assets:
In addition to money spent on expenses prior to opening the business, you probably also spent money on some machinery, spare parts, and other tangible assets that have economical value and could be classified as inventory or fixed assets. You could use those assets and bring them as your or your partners' personal property into the company in the form of a capital contribution. Debit: Inventory/Fixed Assets Credit: Shareholder Capital/or Shareholder Loan if you expect the company to be able to eventually reimburse you.
Whichever way you go, I highly recommend you get in touch with a professional who is experienced in handling tax issues. You should concentrate your time on getting your business going and avoid to have to spend time and money at a later date.
Stay safe and good luck with your venture.