Are you a planning to start your business? If yes, then surely you would be incurring some expenses. It means perhaps you would be anticipating deducting these expenses in the very first year of the operation of your business. But it is not as simple as this, rather much more complicated!
The expenses incurred by a business in the beginning of its incorporation are usually vehicle purchase, equipment purchase, start up expenses, organizational costs and leasehold improvements etc. Each of these and other expenses actually receive different tax treatments. So, how can you take care of all this, have a look at the points mentioned below to get a better understanding of expenses and taxes:
1.Start up Costs
In the first year of your business, a startup can deduct around $5,000 of its start up costs. These start up costs usually consist of analyses of labor supply, facilities, transportation etc, advertisements related to business opening, travel related costs to secure suppliers, distributors and customers, wages paid to employees and if they are being trained, then to their instructors also and the fees paid for professional services and to consultants. However, this amount of five thousand dollars are reduced by the amount of costs in excess of fifty thousand dollar costs.
The small trucks and automobiles that are purchased for business use comes into the equipment category. However, they are subject to the luxury auto rules with a recovery period of 5 years.
3. Organizational Expenses
If your new start up business is a corporation or partnership, you can easily elect to deduct the organizational expenses up to $5,000 in the very first year of your business. These expenses consists of incorporation fees, organization meeting costs, temporary director’s fees and legal services among others.
You can’t make any decision regarding equipment deductions, until your business starts functioning. The equipment cost basically can’t be deducted until the equipment is placed in service. For most of small businesses, the entire cost of office furnishings and equipments can be written off in the first year of purchase, that means the deductions for them are liberal.
But it is not always lucrative to deduct the entire cost in the first year itself. This means the cost of equipment should be depreciated over its useful life. For instance, the depreciable period for a computer is five years and 7 years for most of the office furniture, equipments and fixtures.
As a general rule, leasehold improvements are depreciated over the course of 15 years. Moreover, the expense deduction of sec 179, is allowed for qualified retail improvements, qualified restaurant property and qualified leasehold property.
These are the most common issues in the first year of your business. It requires you to make some important decisions and elections that have a lasting impact on your new business. The best approach is to consult with a professional and hire an accountant to prepare your tax plans so that you can help your business with these issues right from the start.