Most start-up costs are considered capital expenditures, which are usually not tax deductible and can only be regained when you sell your business. Specific start-up costs, though, can be amortized, allowing you to deduct a portion of a cost over a number of years. The Internal Revenue Service states that a typical amortization period usually consists of 180 months.
What Can Be Amortized
Amortized items usually consist of intangible assets such as training expenses that contribute to the earnings potential of a company. A cost can only be amortized if you sustain or pay it before your first day of business or, if your company has started operations, the IRS has deemed it a qualified business expense. These rules can help business owners decide whether they want to buy an existing business with existing amortized costs, or create a business of their own.
Start-up costs that can be amortized include instructional and training costs for new employees, advertising costs associated with your business's opening and wages for workers who are in training for the launch of your business. Other amortizable items can include start-up costs related to traveling and coordinating with distributors or suppliers, and business research necessary to get your business underway, including consumer surveys and market research on competition.
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Similar to start-up costs, you can amortize some organizational costs that directly contribute to the starting of a company. These organizational costs may include wages for temporary directors who help in training and setting up the business, costs of meetings required to organize the business, and state incorporation fees, which can vary widely depending on what state you are planning to incorporate your business in.
How To File
To amortize costs, the IRS requires that you make an "election" by completing Part VI of Form 4562, which must be filed in the first tax year that your business begins operating. When filing your taxes you must attach Form 4562 to your tax return, along with a written statement that includes the month your business started, the amortization period you are filing for, an explanation of your business, and a brief account of each start-up or organizational cost you are claiming can be amortized.
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