Small Business gets a Break on Start Up Expenses

Small Business gets  a Break on Start Up Expenses

When and how do I deduct expense incurred before I opened my business?

Most new business and rental property owners will pay or incur expenses for investigating the viability of a business and expenses before actually opening the business or renting the property.  These expenditures are known as startup costs and examples include analysis of potential markets and products, advertisements for the opening of the business, salaries and wages for training and education, and other expenditures that would normally be deductible if the business were open. These costs are covered in Internal Revenue Code 195 expenditures and have specific rules on when and how a tax deduction is elected.

The law requires these costs to be capitalized and not automatically deductible in the current year as a periodic cost.  However, an election may be made to expense up to $5,000 of these costs in the year in which the business opens.  This $5,000 deduction is reduced dollar for dollar once startup costs exceed $50,000. Thus if start up expenditures exceed $55,000 no deduction is allowed. The election is made on Part IV of Form 4562 and is due by the date of the return including extensions.  The remaining balance of startup expenses must be amortized over 15 years or 180 months. If the trade or business is disposed of before startup expenses are fully amortized the remaining g costs may be deductible in the year the business closes.

The organization costs of business entities are often confused with startup expenses. Although there are similarities in how they are treated by the IRS they should be segregated.  The IRS considers these expenses a separate cost and consequently a separate election is made for organizational costs.

Electing to deduct all or portion of startup expenses depends on the particular situation of the business, the owners of the business, and future operations. You should always speak with your trusted advisors about your particular situation.

Brian is a CPA at Gamwell Caputo Kelsch & Co., PLLC in Conway, NH and can be reached at 603-447-3356. Brian welcomes any article feedback or questions for future article consideration.

Will these tax breaks be extended?

As of December 9, 2014 there are more than 50 temporary tax provisions that have not been extended for 2014. This normally would not be an issue as tax laws change frequently. The problem is that many taxpayers are expecting them to be extended for 2014, but without Congressional action they will not be part of your 2014 tax return. If they do get extended the Internal Revenue Service will have to change hundreds of tax forms and related instructions, and update computer coding to accept, process, and calculate returns. Congress wants the IRS to be ready to accept 2014 returns in January when laws effecting 2014 still have not been finalized. Do not expect the IRS to be capable of pulling this off. The likely scenario is that 2014 returns will begin to be accepted in late February at best.

While it is frustrating to try to plan and project your taxes when laws may be made retroactively, here are a few credits and deductions that may impact your return:

  • Educator expense – This $250 deduction for eligible educators spending money on qualified expenses is not currently available for 2014. For purposes of the deduction, eligible educators were defined as teachers, instructors, counselors, principals or aides for kindergarten through grade 12 who put in at least 900 hours during the school year in a school that provides elementary or secondary education.
  • Sales tax deduction – Congress allowed taxpayers to deduct sales taxes paid in lieu of state income taxes paid. This was a valuable deduction for those that did not have significant income taxes and itemized deductions on their personal tax return.
  • Section 179 depreciation – Prior to 2014 many small business owners were able to fully deduct the purchase of equipment used in their business. This was limited to $500,000 for 2013, but for 2014 this deduction will only be $25,000 unless the temporary tax law is extended.
  • Energy efficient improvements – Currently, there is no tax credit available for installation of energy efficient doors, windows, insulation, or roofs. For 2013 the maximum credit was $500.
  • Tuition and fees deduction – The tuition and fees deduction of $4,000 expired at the end of 2013. This was an “above the line” deduction (meaning it was available for those that took the standard deduction). Qualified education expenses are tuition and related expenses at an eligible educational institution.

Brian is a CPA at Gamwell Caputo Kelsch & Co., PLLC in Conway, NH and can be reached at 603-447-3356. Brian welcomes any article feedback or questions for future article consideration.

2015 Taxes

As usual there are plenty of unknowns and changes as we close the 2014 tax year and prepare to file tax returns in 2015.

First, the good news. Tax rates are unchanged for the first time in a while — the bottom rate remains at 10 percent and the top rate remains at 39.6 percent. Personal exemptions and standard deductions are adjusted slightly for inflation.

As expected, there are a number of provisions unchanged from 2013, including IRA contribution limits ($5,500 or $$6,500 if over 50), Gift Tax exclusion limits ($14,000), and the Kiddie Tax threshold ($2,000). The Pease limitation, which returned for 2013, remains in effect and limits the amount of itemized deductions allowed for high income earners ($254,200 single; $305,050 married).

The new safe harbor method for deducting home office expenses returns as do last year’s new taxes compliments of the Affordable Care Act (ACA) — the Net Investment Income Tax and the Additional Medicare Tax.  In tax world, ACA is the gift that keeps on giving, so there are more new tax provisions kicking in this year.

First is the Premium Assistance Tax Credit reconciliation. Anyone who qualified for subsidized health insurance through the government exchanges will have to reconcile subsidies received against subsidies earned and report the difference on their 2014 tax return.

Taxpayers who purchased insurance through the exchanges, and qualify for subsidies not received, can claim those subsidies on their 2014 returns. In addition, the ACA’s individual mandate began in 2014, requiring everyone to purchase and maintain qualified health insurance for every month of the year, unless a qualifying exemption was granted. Those who fail to meet this requirement must calculate their Individual Shared Responsibility Payment and include it on their 2014 return.

Finally, there are many tax breaks that expired at the end of 2013 which have not yet been renewed. Some of the most popular of these “extenders” are the $250 adjustment for classroom expense by teachers, the itemized deduction for state and local sales taxes and the exclusion of personal residence debt from income.  Many in the tax industry believe these breaks may be brought back, retroactively, before the end of the year causing issues for IRS, software vendors, tax preparers, and tax filers.

The 2015 tax filing season “will be one of the most complicated filing seasons we’ve ever had,” IRS Commissioner John Koskinen said in an address to tax professionals at the end of October.

Brian is a CPA at Gamwell Caputo Kelsch & Co., PLLC in Conway, NH and can be reached at 603-447-3356. Brian welcomes any article feedback or questions for future article consideration.