Expenses incurred in starting a business are treated as capital expenses and are a part of your basis in the business. As a result, you generally cannot recover these expenses until you sell or close the business. However, you can elect to deduct start-up expenses up to $5,000 in the year the business begins.
The $5,000 limit is reduced, but not below zero, by the amount by which the start-up expenditures exceed $50,000. The remaining start-up expenditures not deducted are amortized over a period of 180 months. This election applies to all expenditures paid or incurred after October 22, 2004 in connection with a newly created business.
There are three types of start-up expenses that you can amortize: (1) expenses incurred in investigating the creation or acquisition of a business; (2) expenses incurred in connection with creating a business; and (3) expenses incurred in connection with an activity engaged in for profit and for the production of income before business begins, in anticipation of the activity becoming an active business. These expenses can be deducted only once business operations have commenced. Note, however, that interest expenses, taxes, and research and experimental expenditures are excluded from start-up expenses, because they are currently deductible under special rules and, thus, are not required to be amortized.
Amortized start-up expenses would include the cost of items such as the following: an analysis of the need for a landscaping company in a particular area, securing prospective seed and plant suppliers, locating land for the nursery (but not any fees incurred in acquiring the land), advertisements announcing the opening of the business, business licenses, certain professional services (for example, an accountant’s fees for setting up a bookkeeping system). However, you would not be able to amortize expenses incurred in acquiring equipment such as tools and lawn mowers because expenses incurred for a particular asset generally are recovered through depreciation deductions.
To amortize your start-up expenses, you must complete Form 4562 and attach it to your federal income tax return (Form 1040) for the first taxable year in which you are in business.