IRS Form 1095-B provides information about health insurance coverage. The Affordable Care Act (ACA), also known as Obamacare, requires that insurance providers send this form to those whose coverage meets the minimal standards of the law.
"Start-up costs can be anything from market research and analysis to finding locations for your business," says Chip Capelli, an accountant with offices in Provincetown, Massachusetts and Philadelphia. "They can include the costs of staff training, attorney fees, and establishing vendors and suppliers.
Advertising in anticipation of the opening is also a legitimate start-up expense, as are organizational expenses. If you decide to organize as a corporation or partnership, you must incur these expenses before you can enter the business. If you are not sure which of your costs qualify, TurboTax will guide you through all of your deductible business expenses.
Most of your start-up expenses are treated as capital costs for tax purposes. The IRS considers them to be long term assets, which means you are investing in the future of your business. As assets, you generally must depreciate them rather than deduct their cost in the year they are purchased. This means you can recover the expense spread over several years. The exact number of years you can make a deduction for depreciation depends on the nature of each asset. For example, software is depreciated in three years, but if it is already installed on your new computer, it is depreciated in five years. You can choose to amortize other costs.
The ACA also requires most Americans to have health insurance that provides a basic level of benefits, called minimum essential coverage. People enrolled in a health plan that provides minimum essential coverage will receive a copy of Form 1095-B from their insurer at the end of the year, which describes their coverage and the months that it was in effect.
Some start-up expenses, such as organizational costs, may be amortized or the full cost may be deducted in the year of opening. But if amortization is chosen, certain rules apply:
- Costs must be incurred before the opening of the business.
- Associated costs must also have been incurred if your business has been operating for years
Amortization is somewhat similar to capitalization in that it also involves stretching the deductions over a period of time. You can choose your own amortization period, but when you do, you get stuck in it. The IRS won't let you change it later. If you choose to amortize the costs instead of deducting them directly, it may benefit you in future tax years. It may be an option if your business is not generating much income in your start-up year, but you expect to make a good profit in future years, so the tax reduction would be more beneficial at that time.
Some costs do not qualify as start-up expenses Some equipment you must purchase is treated as a regular business expense. For example, if you are opening a landscaping business and buy a truck, you usually have to capitalize and depreciate the cost. These expenses are treated the same way as if you had been operating your business for decades. Time can be important.
Time matters too. "Start-up costs are only deductible if your business gets a real start," says Capelli. "And they have to be incurred during the planning and development phase of your business. Otherwise, after that, they become operating expenses. The other side of the coin is that, even if your business is not yet up and running, when you incur start-up expenses, you can either deduct them or start deducting them in your first year of operation. Keep good records.
A deductible expense only works if you can prove that you spent the money. The burden of proof is on you to prove that you spent what you said you spent. "Good records are vital," says Capelli. "You have to keep careful records of your expenses and that includes keeping receipts." Now that you know the basic rules, check out our other articles on business tax deductions.