Many of the new members joining Collective have come to us with seasoned businesses. However, there are a few that are embarking on a new business and want to know if they can count the expenses incurred before their S Corp start date.
Fantastic news! Your startup costs are eligible for write-offs within your business. Of course, the IRS has graciously provided specific guidelines on the art of cost deduction. So, let's walk through the rules and make sure you can clearly understand the rules on qualifying startup costs.
Let’s paint the picture with our member, Max, as an example.
Max is pumped to start his new business in marketing consulting. He joins Collective in July and anticipates his business starting to take off in October. Thus, jointly with Collective, he elects for his Box E date on his form 2553 (the day the IRS recognizes a company as an S Corporation) as 10/1/2023.
However, between July and October, Max spent personal money to get his business ready to start servicing clients. He might have purchased a computer, enrolled in recurring software subscriptions, taken a potential client out to lunch and, of course, paid Collective to get his business started.
When he finally gets to his training call with his onboarding accountant, he should make sure to include these expenses on his company books. But how will this be recognized?
There are two ways to report Startup Costs:
Startup costs totaling less than $50,000
In this situation, you can immediately expense $5,000 in the first year. If the expenses go beyond $5,000, the excess amount becomes an asset and can be deducted little-by-little each year over the next 15 years.
Startup costs greater than $50,000
For this circumstance, you cannot immediately expense any amount. Instead you will evenly disperse the startup costs over 15 years.
What qualifies as a Startup Cost?
As a general rule, if the expenses are normally deductible in the course of business they would qualify as a startup cost.
The IRS defines a qualifying cost as either:
A cost a business could deduct if they paid or incurred it to operate an existing active trade or business, in the same field as the one the business entered into.
A cost a business pays or incurs before the day their active trade or business begins.
Some examples include:
Advertisements for the opening of the business.
Salaries and wages for employees who are being trained and their instructors.
Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
Software costs
For Max's marketing consulting business, he can likely only deduct expenses directly related to its operations. Simply put, if an expense doesn't support or fit the main functions of Max's marketing business, it might not qualify for a deduction.
I hope this article helps clear up any confusion you might’ve had on startup costs! If you have questions on whether your expenses qualify for your new S Corp, please reach out to [email protected]. We're here to guide you every step of the way in launching your new business and alleviate some of the stress associated with financial considerations.
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