(Money Matters) How do I account for start up costs? Kasfia Rashid

Kasfia Rashid - “Money Matters with Kash the Bookkeeper”

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Introduction: 
Hello! Welcome to Money Matters- Ask the bookkeeper series, the accounting show answering burning accounting questions! You know, the ones you would only ask your best bookkeeping buddy! 

Each show will have one main question from the audience with supporting questions from my various travels. Have a question to ask? Don’t be shy, step right on up! You can submit your questions directly to Hello@kashthebookkeeper.com! You may hear your question aired live across the globe! 

We  have answered questions all over the financial map, from cash reconciliation to pricing digital products! Today we start our final topic, expenses with the burning question of the week : “How do I account for “start up” costs?”. Start up costs traditionally are expenses that take place before a business actually starts collecting revenue, however, the concept can be applied to any “first” in a business. 

“Start up costs” is really a mis-nomenclature since there is no actual accounting or financial difference between business expenses and “start up costs” except the timing. Usually small business expenses are incurred after the business has been established while start up costs can be thought of as pre-launch expenses.  For the purposes of our conversation though and for most planning purposes, let's agree to this standard definition: expenses incurred before income can be generated by a service or a product. 

Here in the US, there is a tax deduction called “organizational costs,” and it can usually be used to claim all or a portion of “start up  costs” on the income tax return in the year the business started, depending on how much you spent. You can also “amortize” or spread out the remaining costs over a certain number of years.

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Show Objectives - The Why 
Deciding to start a business is exciting, but can also be daunting if you’re a new entrepreneur. Calculating business startup costs, worrying about long-term profitability, securing startup funding—it can all be pretty stressful.

Still, the question “how much does it cost to start a business?” is critical because the initial investment can be significant. 

Before you start or buy a business, you’ll likely go through a long process of analysis and research. The money you spend doing market research, figuring out your product, looking for an office space, advertising your business launch, and doing anything else to investigate, launch or buy a business are generally deductible. (You might hear your accountant or tax lawyer refer to these simply as “investigation” costs.)

These are any costs involved in the actual formation of a corporation, partnership or LLC. (Your accountant or tax lawyer might also refer to these as “incorporation” or “partnership” costs.)

When you incur startup costs, you must accurately record the corresponding ledger entries in your accounting books. And, you must properly report them for tax purposes. Tax reporting and accounting for startup costs are handled differently, so it’s important to have a basic understanding of both.

Depending on where you live the tax implications and treatment of start costs will vary greatly. Reach out to a local tax professional to get more details on the different deductions available to you. 

But this is not a tax show, it's an accounting show, and no matter where you live or what services you provide or product you sell, expenses related to them before they can be sold can and should be tracked. Doing so will give us our costs basis and our worth in the company ( equity)! 

What You Need to Know - The What
What are startup costs?

Startup costs are the expenses you incur before your business begins active operations. The costs might be associated with opening a new business or facility, acquiring a business, introducing a new product or service, conducting a business in a new area, or starting a new process or operation in an existing facility. Startup costs are usually associated with one-time activities. Small business startup costs can sometimes overlap with fixed assets and inventory costs. Ask an accountant to help you properly organize your books.

Examples of startup costs for a new business include:

• Investigating whether to create or buy a business
• Organizing a partnership or corporation
• Opening a facility
• Consulting fees
• Advertising
• Wages to train employees
• Travel costs for securing distributors or suppliers

Startup costs do not include:

• Deductible interest
• Taxes
• Experimental costs

Other eligible business start-up costs include:

• Customer surveys
• Market research expenses (publications, focus groups, consulting, etc.)
• Product research
• Site selection costs (i.e. money you spend searching for and securing an office or workspace)
• Professional and consultant fees
• Costs associated with acquiring an existing business
• Costs of leasing a business property
• Equipment costs

Organizational costs: These are any costs involved in the actual formation of a corporation, partnership or LLC. 

Typical qualifying organizational costs include:

• Incorporation fees
• Partnership filing fees
• Legal fees for services incident to the organization of the corporation or partnership, such as negotiation and preparation of the partnership agreement
• Accounting fees for services incident to the organization of the partnership
• The cost of organizational meetings
• The cost of temporary directors

What You Need to Do​​ - The How
Accounting for startup costs is fairly straightforward. All startup costs are treated the same way for accounting. Keep as much detail in the accounting as possible! Break them down into sub categories or simply label them on your books and records with a “start up” tag. 

Record business startup costs as they are incurred. Use checks and a paper trail where ever possible. This will make it much easier to determine which costs can be tax deductible right away and which need to be amortized over a number of years. 

You can make a startup costs deduction in the tax year your business begins operations. Depending on the category, there might be an election to amortize startup costs. Amortization refers to distributing the deduction over time instead of deducting the full startup costs at once. Amortization of startup costs usually occurs over a 180-month period.

Talk to your accountant about deducting costs and amortization. They can help determine if you can deduct or amortize costs. Your accountant can help you determine how much you can deduct now and over time. And, the accountant can create the best tax strategy for your business.


Articles :

1. https://bench.co/blog/tax-tips/startup-costs-deduction/ 
2. https://www.patriotsoftware.com/blog/accounting/accounting-for-startup-costs-expenses-examples/  
3. https://www.thebalancesmb.com/how-to-deduct-startup-costs-on-business-taxes-397608 

Additional Resources 

1. Check out Kash’s Youtube Playlist: Bookkeeping basics for small business owners. 
2. Want to learn how to use QuickBooks? Click here for three free videos! 
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Next:  When should I start hiring employees?

​Written by Kash the bookkeeper  

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