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First Year Operating Losses

Businesses in their first year of operation often have a loss. They are trying to build a customer base and establish themselves as a legitimate business. This can be expensive and the tax law limits how much of these “one time, first year expenses” a business can deduct.

Start-up Costs:

Startup costs include advertising, marketing, training and office expenses incurred before you open your business. The IRS allows only $5,000 of start-up costs to be expensed in the first year. The remainder has to be amortized over a 15-year period. After a business is opened, these types of expenses can be deducted without limitation. A business is considered open when it is a going concern. In other words when it begins operating independently with the purpose of making a profit, with business records being kept, and customers being solicited. It is best to document the business is open by saving marketing materials or taking pictures of the opening day.

Maximizing Organizational Expenses Deductions:

To get the largest tax deduction, separate organizational expenses from the start-up costs. This will allow a business to deduct up to an additional $5,000 in “first year expenses”. These expenses would include attorney’s fees and Secretary of state fees paid to set up your business. Accountant fees can also be placed in this category if projections were used to determine ownership percentages or other details contained in organizational documents. As with Start-Up costs any amount over $5,000 has to be amortized over a 15-year period.

If after incurring start-up costs and organizational expenses, a decision is made to abandon the business, these costs can not be deducted as a loss on your tax return. The IRS considers them as personal expenses.

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