Tax Question: Writing Off Startup Costs In the First Year of Business

April 9, 2013 2:13 PM

Question about whether it's worth it to write off approx. $2500 in startup costs for a small business that generated no income in 2012, and whether it's worth it to do so.

You are not my CPA, but any general advice would be helpful. I started a business in 2012 that required some computer equipment, additional office supplies, and some work with a contractor (approximately $1300 for the computer equipment, another $1200 for contractor services).

There was no income for 2012. The business is generating income now (2013).

1) Is it worth it for me to try and write off the $2500 in startup expenses for U.S. federal income taxes? From my understanding, I would have to amortize this out over a period of several years. I feel like this would make such a small dent in my overall taxes it may not be worth the time spent filling out forms to amortize the equipment.

2) If I don't write off startup expenses now, will I be able to write off them off for 2013 taxes even though these things were purchased in 2012?

Any advice appreciated, thanks in advance.

posted by The ____ of Justice to Work & Money (4 answers total)

Check out Section 179 of the IRS tax code. It lets you deduct the full purchase price of some business equipment and software in one lump sum instead of depreciating it over several years.
posted by Longtime Listener at 2:39 PM on April 9, 2013

Hey Justice - IANYCPA, but you can writeoff the first $5,000 of start up costs in the year they're incurred. The rest is amortized over 180 months.

To qualify as a startup cost, your expenditures have to be incurred in connection with the creation of an active trade of business. I'm not sure the computer equipment would fall into that definition.

Instead, you capitalize the computer equipment (because it's an asset, not an expense).

Without any net income in 2012, you can't take section 179 on the that equipment. BUT, you can take bonus depreciation which lets you deduct 50% of the purchase price plus a little extra.

Depending on your personal tax situation, you'll likely be able to take any unused business losses from 2012 and apply them towards your 2013 return.
posted by MediaMer at 2:44 PM on April 9, 2013

If you can blow off the opportunity to write off $2500 as "not worth the time spent," you're very lucky.

Those of us who can't (or don't want to) afford to do that, we get organized and keep detailed records, electronically. It is well worth the time and effort. Get Quicken Home and Business or any other package, categorize aggressively and intelligently, and when it is time to do taxes, you just generate a few reports, pop the numbers into your tax software (TurboTax can even talk to Quicken directly), and then every year thereafter, things like depreciation and unused business losses will just magically propagate forward to next year (keep using the same software and keep backup copies of your files!).

Without net income, as MediaMer said, you won't be able to take sec 179, and no income (or a loss) severely limits deductions.
posted by jgreco at 5:48 PM on April 9, 2013

Response by poster:
Those of us who can't (or don't want to) afford to do that, we get organized and keep detailed records, electronically.

@jgreco--I don't think I would be able to afford it either, but as you've said, not being able to take sec 179 makes me think I'm barely going to get much--if anything--back for those start up costs.

On the other hand, this bonus depreciation under 179 sounds like it's worth it? So I'll be filing those equipment costs with my 2013 taxes instead...is this correct?

Thanks for all your help, everyone. I definitely want to get an accountant next year since I've got a little income stream. I just didn't know if it was worth it to try for business deductions for a year that had no income.
posted by The ____ of Justice at 11:45 PM on April 9, 2013