Tax Deductibility of Start-Up Costs in CT and NY

People often want to know if the expenses in starting up a business are tax deductible.  The answer is that they amortizable (that means deduct over 15 years) unless there is a special provision which allows you to deduct them faster. 

Fortunately, there is special provision which allows small businesses to tax deduct up to $5,000 of start-up expenses.

However, this is a small business targeted deduction so there are limitations on the tax deduction.  Generally, if the expenses are $50,000 or less, you deduct up to $5,000 in the first year, plus you can amortize the balance over 180 months. If the expenses are more than $50,000, then the $5,000 first-year write-off is reduced dollar-for-dollar for every dollar in start-up expenses that exceed $50,000. Here in New York and Connecticut, you can easily exceed these limits.  In addition, since the state laws are different, whether you are operating in Weston CT or North Salem NY makes a difference.

Generally, start-up expenses are all expenses incurred to investigate the formation or acquisition of a business in preparation of that activity becoming an active business. For instance, a start-up expense would be the cost of looking for companies to acquire and visiting potential business locations in CT, NY or surrounding states.

So these startup expenses are ones that would be tax deductible if they were paid or incurred to operate an existing active business.   They include the cost of investigating the creation or acquisition of an active trade or business. This includes costs incurred for surveying markets, product analysis, labor supply, visiting potential business locations and similar expenditures.  They also include the cost of getting a business ready to operate. These include employee training and wages, consultant fees, advertising, and travel costs.

As soon as you are operational (either open for business or conducting transactions), your costs are considered to be the expenses of an operating business.

The election to tax deduct start-up costs is made by claiming the deduction on the tax return for the year in which the active trade or business begins.

If you ultimately decide not to go into business, your costs might not be deductible.  The portion of costs you paid to generally investigate the possibilities of going into business, or to purchase a non-specific existing business, are considered personal costs and are not deductible.

However, the costs that you paid in your attempt to start or purchase a specific business are considered a capital expense and you can claim them as a capital loss.

If you purchased any business assets along the way, you can claim a loss only if and when you sell or dispose of the property.

Elder, Wills, Estates, Trusts, Special Needs Tax & Business Law; Attorney John Sweeney

Sweeney Legal, LLC, provides legal, practical, and business counsel to Seniors, families, and businesses in the Fairfield, Connecticut area, including the communities of Bridgeport, Bethel, Brookfield, Danbury, Darien, Easton, Fairfield, New Canaan, Newtown, Norwalk, Redding, Ridgefield, Stamford, Weston, Westport and Wilton. John is also licensed in New York serving Westchester County including the towns of Bedford, Lewisboro, Mount Kisco, North Salem, Pound Ridge, and Somers.

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