April 26, 2019 en_US If you started a business last year and incurred some expenses before you officially opened your doors, you may be entitled to deduct certain startup costs. https://quickbooks.intuit.com/cas/dam/IMAGE/A2JHWTfU0/8270a940416449e86f5eed3c5e2ae650.jpg https://quickbooks.intuit.com/r/taxes/3-tax-deductions-available-only-to-startup-businesses/ Startup costs: understanding the totals, taxes and timing

Startup costs: understanding the totals, taxes and timing

By QuickBooks April 26, 2019

Every year, millions of startups spring up around the globe, as business owners try to succeed in numerous industries. No matter the type of business, every startup faces a life of excitement, fear and uncertainty. Something else every startup has in common? Startup costs.

No two startups are the same, but each one requires at least some financial investment. Let’s take a closer look at common expenses for startups.

The ins and outs of startup costs

Few things are as exciting as launching a new business. But, amid the excitement of launching a business, it’s important to look at what startup expenses are needed to get your business off the ground. You may not need much money (depending on your type of business), so don’t panic yet.

Typical needs of a startup or small business

If you’re working in a really niche industry or business, you may need some things that are specific to your industry. Still, nearly every business will need some overlapping items, services and assets. Again, these are the things most businesses need. You may not end up needing them in your particular industry, but there’s a big chance these business expenses are in your future.

  • Business insurance: Just like a car, businesses need to be insured. Business insurance will protect you and your business from various lawsuits, damages, and more. In short, business insurance — much like car or health insurance — can keep you from paying hefty legal fees and settlements in the event of an accident or lawsuit. Fun? No. Necessary? Absolutely.
  • Office space: Depending on your type of business, office space can be necessary. If you can run your business from your house the first year or two, that’s excellent. Even still, if you think you may grow and need office space down the road, start planning and setting money aside as soon as possible. (Office space isn’t cheap.)
  • Real estate: Maybe you don’t need office space, but do you need real estate? Typically, business space carries a higher price tag and heftier taxes than living space, so do your homework as soon as possible and determine if and where you can afford real estate. Again, if running your business from your home is an option in the beginning, you may want to go that route.
  • Office supplies: Even the tiniest businesses will need some kind of office supplies. A package of pens may only set you back a few dollars, but over the course of a year, numerous reams of paper, staples, pens, and office equipment can add up to hundreds or even thousands of dollars.
  • Business cards: Every business needs some kind of business cards. You may think you can skirt by without them, but there will come a point where you wish you had a business card on hand to give someone. In the startup phase, networking and word of mouth is especially important. Capitalize on that with business cards.
  • Business assets: Logos don’t create themselves. If you’re not design-savvy, you’ll need to hire someone to make sure your logo looks professional, your merchandise looks great, and your store or website is tip-top. You may also want to pay a designer to make sure those aforementioned business cards are looking bold and professional too.
  • Professional fees: Certain businesses may require accountants or experts to make sure your plan is secure and legal. This is especially true if you’re selling a service. If you’re opening a simple little shop, you will still likely need a business plan at least, which can set you back several hundred to several thousand dollars, depending on the extent of planning required.
  • Small business loan fees: Few small business owners have the cash needed to launch their business immediately. This makes a small business loan likely. If you require a small business loan, make sure you consider the fees and interest that can come with it.

Startup costs for a restaurant

You might be wondering why restaurants get their own section. There are a few reasons: They’re popular, they’re expensive, and they have a high failure rate. Your average restaurant will close within its first year. Why? They’re expensive and complicated.

Understanding restaurant startup costs can help new restaurant owners be better prepared and reduce the chance of failure. If you’re a restaurant startup, here are the typical costs that come with entering the restaurant business.

  • Proper square feet: You’re going to need the right amount of space to run a restaurant. How much space will depend on the type of restaurant you want to open. If you’re planning on opening a small restaurant, like a coffee shop, a small space is perfect. If you want to become a bastion of fine dining, you might want to check out larger spaces.
  • Kitchen equipment: One of the largest costs of any restaurant is the kitchen equipment. Even simple little cafes need espresso machines, blenders, mugs, pitchers, utensils, and so on. You can save a bit by purchasing an existing restaurant, but you’ll likely need new equipment before you launch or shortly after.
  • Point of Sale system: A Point of Sale system, or POS, is a necessary expense for any restaurant. While you can cut back and use a dated system that doesn’t allow credit cards, you will lose out on sales. This makes a cutting-edge POS system a worthwhile expense in many cases, but that doesn’t take away the sting of the price.
  • Full-service bar: Not every restaurant needs a full-service bar, but they can do wonders for sales. If you want to run a full-service bar, you’ll need to look into getting a costly liquor license, buying the right bar equipment, and hiring a number of employees to staff it throughout the week.

Restaurant costs add up very quickly, but they can be rewarding and very profitable if the profit margins are right. Don’t let the numerous costs scare you off if you truly want to pursue the industry. If you deem a restaurant too costly, consider pursuing a food truck business.

Understanding startup deductions

If you started a business last year and incurred some expenses before you officially opened your doors, you may be entitled to deduct certain startup and organizational costs on your tax return this year. But, the IRS has strict guidelines you must follow to claim them. Here’s a look at the rules.

The allowable deductions

According to the IRS, there are three categories of startup costs eligible for tax deductions, and you can only deduct them if you actually opened the business. Chapters 7 and 8 of IRS Publication 535 outline these deductions in full detail. The key takeaway is that startup costs must be related to one of three things:

  1. Creating a trade or business (or investigating the creation or acquisition of an active trade or business): Some of these costs might include surveying markets, analyzing products and the labor supply, visiting potential business locations, and any other costs associated with creating or investigating a new or existing business.
  2. Preparing the business to open: Any costs you incurred before opening your doors are included in this category with the exception of equipment, which will have to be depreciated. (This means you can write off a portion of the cost over a period of time.) Some eligible expenses in this category could include employee training, travel expenses to locate suppliers and distributors, advertising expenses, and consultant fees (such as attorney and accountant fees).
  3. Organizational costs: If you legally set up your business as a partnership or corporation before the end of your first year in business, you can deduct these costs as well. The expenses typically associated with incorporating are: legal fees, state organization fees, salaries for temporary directors and organizational meetings. Expenses associated with setting up a partnership agreement include: legal expenses as well as filing and accounting fees.

How to take the deductions

The IRS allows you to deduct $5,000 in business startup costs and $5,000 in organizational costs, but only if your total startup costs are $50,000 or less. If your startup costs for either area exceed $50,000, the amount of your allowable deduction will be reduced by that dollar amount. And if your startup costs are more than $55,000, the deduction is completely eliminated.

For instance, if your startup costs were $53,000, you would lose $3,000 of the deduction, and would only be allowed to deduct $2,000. And if your startup costs were $55,000 or more, you don’t qualify for the deduction at all. The costs remaining after your deduction should be amortized (paid off over a period of time) annually in equal portions over the next 15 years.

You should claim the startup deduction for the tax year that the business officially opened. If you fail to claim the deduction, you can still file an amended return within six months of the return’s due date (not counting extensions). If you do that, the IRS says you should write “Filed pursuant to section 301.9100-2” on your amended return, and send it to the same address where you sent your original return.

Timing is everything

Sometimes taking the deduction in the first year doesn’t always make financial sense. For instance, if it’s likely that you will suffer losses for the first few years in business, you might be better off amortizing the deductions over a few years to balance out your eventual profits.

To do so, you need to file IRS Form 4562 with your first year’s tax return. You can amortize qualified startup and organizational costs, and they don’t have to be on the same amortization period. But keep in mind that once you choose the periods for each deduction, you will not be allowed to change them. Be sure to talk to a tax adviser about this important decision.

Startup costs: worth every penny

Looking over the ins and outs of startup costs, you might be feeling a little intimidated. Yes, there’s a lot that goes into a startup, but startups bring with them an unparalleled amount of freedom.

Start tracking what you need for your startup, keep documents and receipts from all purchases, and stay organized. Make sure you’re aware of all appropriate forms, contact your tax specialist or accountant when in doubt, and you can have a startup to call your own in no time.

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