June 2018

Capitalizing On Deductions As A New Corporation

Starting a new business can be exciting - but it can also be expensive! Although the costs will vary, a recent study estimated that the average cost of starting a new business was about $30,000. Fortunately, there are tax deductions available for certain expenses as you prepare to begin business operations, and new entrepreneurs working closely with a CPA and an attorney can take full advantage of what the tax code has to offer.

It can be helpful to examine your corporate expenses based on these three types:

Organizational expenditures

· Legal fees for drafting the corporate charter, bylaws, and terms of the original stock certificates.

· Accounting services.

· Expenses for meetings for the directors and shareholders.

· State incorporation fees.

Your corporation may elect to deduct up to $5,000 of these expenses in the tax year in which it begins business.

However, the $5,000 amount is reduced (but not below zero) by the amount by which the cumulative cost of organizational expenditures exceeds $50,000. Organizational expenditures that are not deductible in the first business year are amortized over a 15-year period. If and when your corporation dissolves, the unamortized portion of the expenditures is deductible in full.

Commission, state franchise, and filing expenditures

Any expenses incurred while issuing or selling stock are capitalizable, but they are not amortizable. This means that they cannot be currently deducted nor can they be ratably deducted. Instead, they are added to the basis (cost) of the stock, which benefits stockholders by creating the gain realized on the sale of that stock.

State franchise and filing fees are considered organizational expenditures only if they represent payment for state-provided services rendered during the process of incorporation.

Start-up expenditures

Any expenses you incur while investigating the creation of your corporation, referred to as "start-up expenditures," are also deductible and amortizable in a manner similar to organizational expenses, but under a different provision than that which applies to organizational expenditures.

While many deductions are available for startups, it is important to note that these deductions only apply if the entrepreneur actually ends up creating an active trade or business.

We welcome the opportunity to meet with you to evaluate your company's situation.