Computer and packing boxes at a start-up business

Launching A Business? How To Treat Start-Up Expenses On Your Tax Return

While the COVID-19 crisis has devastated many existing businesses, the pandemic has also created opportunities for entrepreneurs to start-up new businesses.

Computer and packing boxes at a start-up business
The way you handle initial start-up expenses can make a difference in your tax bill.

For example, some businesses are being launched online to provide products and services to people staying at home.

Entrepreneurs often don’t know that many expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.

How Expenses Must Be Handled

If you’re starting or planning a new enterprise, keep these key points in mind:

Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.

Under the Internal Revenue Code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t get you very far today!

And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.

No deductions or amortization deductions are allowed until the year when “active conduct” of your new business begins.

Generally, that means the year when the business has all the pieces in place to begin earning revenue.

To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as:

  • Did the taxpayer undertake the activity intending to earn a profit?
  • Was the taxpayer regularly and actively involved?
  • Did the activity actually begin?

Expenses that qualify In general, start-up expenses include all amounts you spend to:

Investigate the creation or acquisition of a business

  • Create a business
  • Engage in a for-profit activity in anticipation of that activity becoming an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began.

One example is money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the expenditure must be related to creating a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.

Thinking ahead If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the elections described above. Recordkeeping is critical.

At David Mills, CPA, LLC we’re here to help answer your business start-up questions and to offer advice. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.

9 Tax Rules to Consider If You’re Your Own Boss

Does the idea of being your own boss and being in business for yourself appeal to you? 

Many people who launch small businesses start out as sole proprietors. However, there are tax rules and considerations to consider if you’re a sole proprietor.

Here are nine things to consider if you are your own boss

1 – You may qualify for the pass-through deduction

To the extent your business generates qualified business income, you are eligible to claim the 20% pass-through deduction, subject to limitations. 

There are tax rules to consider if you're your own boss

The deduction is taken “below the line,” meaning it reduces taxable income, rather than being taken “above the line” against your gross income.

However, you can take the deduction even if you don’t itemize deductions and instead claim the standard deduction.

2 – Report income and expenses on Schedule C of Form 1040 

The net income will be taxable to you regardless of whether you withdraw cash from the business. 

Your business expenses are deductible against gross income and not as itemized deductions. 

If you have losses, they will generally be deductible against your other income, subject to special rules related to hobby losses, passive activity losses, and losses in activities in which you weren’t “at risk.”

3 – Pay self-employment taxes

For 2020, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your net earnings from self-employment of up to $137,700, and Medicare tax only at a 2.9% rate on the excess. 

An additional 0.9% Medicare tax (for a total of 3.8%) is imposed on self-employment income in excess of $250,000 for joint returns; $125,000 for married taxpayers filing separate returns; and $200,000 in all other cases. 

Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income. 

4 – Make quarterly estimated tax payments 

For 2019, these are due April 15, June 15, September 15 and January 15, 2021. 

5 – You may be able to deduct home office expenses 

If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable portion of some costs of maintaining your home. 

And if you have a home office, you may be able to deduct expenses of traveling from there to another work location.

6 – You can deduct 100% of your health insurance costs as a business expense 

This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.

7 – Keep complete records of your income and expenses

Specifically, you should carefully record your expenses in order to claim all the tax breaks to which you’re entitled. 

Certain expenses, such as automobile, travel, meals, and office-at-home expenses, require special attention because they’re subject to special recordkeeping rules or deductibility limits. 

8 – Requirements change if you hire employees

When you hire employees, you need to get a taxpayer identification number and withhold and pay employment taxes. 

9 – Consider establishing a qualified retirement plan 

The advantage is that amounts contributed to the plan are deductible at the time of the contribution and aren’t taken into income until they’re are withdrawn. 

Because many qualified plans can be complex, you might consider a SEP plan, which requires less paperwork. 

A SIMPLE plan is also available to sole proprietors that offers tax advantages with fewer restrictions and administrative requirements. 

If you don’t establish a retirement plan, you may still be able to contribute to an IRA. 

David Mills CPA, LLC has the expertise to assist small businesses

At David Mills CPA, LLC, we work with small businesses throughout the Central Illinois.

We have offices in Morton and East Peoria and can assist business owners with advice, bookkeeping, payroll, income tax planning and preparations, and business valuations

We can also help business owners understand the various business structures to ensure their business is structured to best meet their needs.

For more information, contact David Mills CPA, LLC today.

Accounting Firms in Peoria, Illinois

One of the Best Accounting Firms in Peoria, Illinois

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If you have been looking for a professional and reputable accounting firm in the central Illinois area, you have come to the right place. David Mills, CPA, LLC is an accounting firm with years of experience in tax preparation, budgeting, payroll services, bookkeeping, business structure, and more! If you need help with finances, we have your back. From personal to small and medium-size businesses, we have the knowledge to provide you with the services you need to get ahead with your finances.

Benefits of Working with an Accounting Firm

When you work with an accounting firm you have the experience and knowledge behind you to make large (and small) financial decisions. This is vital for both personal finances and for business finances! As a person, a large financial decision like a home or a car can majorly impact you and your income. Budget planning can help you decide what options are best for you. As a business, growth and profit are two of the most important outcomes. If you don’t have proper bookkeeping, transactions may be inaccurate and cause financial issues down the line. This could limit profits and growth!

We can also help businesses with setup, training, and troubleshooting of QuickBooks! On top of that, our payroll, controller & CFO services, business structure, and tax preparation services can help you make informed decisions about your business. Leave the technical financial work to us so you can focus on what really matters; your business.

Out of the accounting firms in Peoria, Illinois, choose us to help you get your finances going in the right direction. Give us a call today and tell us how we can help you! We are eager to help you with your personal and business finance needs!