If you are investigating the possibility of starting your own business, you may have heard that you can deduct the expenses you incur while getting things up and running. This is mostly true, though the technicalities of how it is done are more complicated and less immediate than many prospective business owners realize. Review these basics for an understanding of how the process of amortization can help recover start-up costs.
What is amortization?
The IRS defines amortization as the “method of recovering (deducting) certain capital costs over a fixed period of time.” Essentially, it means you are able to deduct qualified expenses from starting a business in a series of installments.
The IRS does allow certain, limited expenditures to be deducted the first year your business is active, up to $5,000. Then the remaining costs fall under the amortization policy, which begins the first month your business is active and continues for a period of 180 months (or 15 years).
What costs qualify for amortization?
Eligible expenses include:
- Costs assumed during investigating the creation of the business, including market and product research and costs from searching for an ideal location or transportation and storage facilities
- Costs devoted to advertising and marketing in advance of the opening
- Fees and salaries for consultants or other professionals whose services you rely on to get the business established
- Salaries and wages for employees and costs associated with any necessary training
- Travel costs incurred while securing prospective distributors, suppliers, or customers
Keep Good Records
Keep in mind that the above provisions apply only to businesses that were successfully opened and operated (consult your tax professional for guidance on expenses related to a failed business), and that the key to successfully amortizing as many expenses as possible is to have receipts, invoices, and bank statements documenting your costs and investments. If you have been working with a tax attorney during your business’s formative stages, he or she can assist you with the process and get you on the road to recovering your investments.