New businesses typically incur expenses before the business is up and running. You might need to research your market, hire a consultant, travel to potential suppliers, or open a facility. These are startup costs.
When you incur startup costs, you must accurately record the corresponding ledger entries in your accounting books. And, you must properly report them for tax purposes. Tax reporting and accounting for startup costs are handled differently, so it’s important to have a basic understanding of both.
What are startup costs?
Startup costs are the expenses you incur before your business begins active operations. The costs might be associated with opening a new business or facility, acquiring a business, introducing a new product or service, conducting a business in a new area, or starting a new process or operation in an existing facility. Startup costs are usually associated with one-time activities.
Small business startup costs can sometimes overlap with fixed assets and inventory costs. Use an accountant to help you properly organize your books.
Startup costs examples
Examples of startup costs for a new business include:
- Investigating whether to create or buy a business
- Organizing a partnership or corporation
- Opening a facility
- Consulting fees
- Advertising
- Wages to train employees
- Travel costs for securing distributors or suppliers
Startup costs do not include:
- Deductible interest
- Taxes
- Experimental costs
Accounting for startup costs
Accounting for startup costs is fairly straightforward. All startup costs are treated the same way for accounting. You will likely lump all startup costs together into the same category. You won’t break the costs down into smaller categories.
Record business startup costs when you incur them. This is typical for accrual accounting.
Let’s say you start a new business. You incur $50,000 in startup costs. Debit your startup expense account to increase the total. Credit the asset account you remove the money from.
| Date | Account | Notes | Debit | Credit |
|---|---|---|---|---|
| XX/XX/XXXX | Startup Expenses | Payments for startup costs | 50,000 | |
| Cash | 50,000 |
It is important to document your startup costs well. You need accurate records because taxes for startup costs are more complicated than accounting for them.
Taxes for startup costs
Handling taxes for startup costs is more complex than recording the expenses in your accounting books. You can’t put all your startup costs into one category. You must break them down into smaller, specific categories. Each category is treated differently for tax purposes.
The categories for your startup costs might include organizational costs, syndication costs, Section 197 intangible costs, tangible depreciation personal property costs, and Section 195 startup costs.
Only specific business startup expenses can go into each category. Have your accountant divide your startup costs into the correct tax category.
You can make a startup costs deduction in the tax year your business begins operations. Depending on the category, there might be an election to amortize startup costs. Amortization refers to distributing the deduction over time instead of deducting the full startup costs at once. Amortization of startup costs occurs over a 180-month period.
Talk to your accountant about deducting costs and amortization. They can help determine if you can deduct or amortize costs. Your accountant can help you determine how much you can deduct now and over time. And, the accountant can create the best tax strategy for your business.
You need an easy-to-use accounting book to record your expenses in. Try Patriot’s online accounting software for small businesses. It’s designed for the non-accountant. Get your free trial today.
This article is updated from its original publication date of January 16, 2018.
This is not intended as legal advice; for more information, please click here.
