For what length of time should start-up costs be amortized. In order to answer this question, you should first know what this means. Amortization is basically an accounting and taxation concept.
The idea is that starting up a new business will involve various costs. Unfortunately, these costs cannot be deducted from your tax bill. This is because you can only do deductions for a business which already exists. And as you know, you’re going to be spending money on your start-up long before you actually start doing business.
This can post a dilemma for start-up founders. Fortunately, this has long been a problem for people involved in start-ups and there are ways around it.
What are the official rules when it comes to amortizing start-up costs?
It all depends on if the start-up is actually successful. If the money you have spent on founding the start-up actually results in a successful business then you are allowed to deduct some of the costs during your first financial year.
You are also allowed to deduct these costs in equal instalments over a period of 180 months, starting from the first month that your business opens. This is essentially what is meant by the word, “Amortize.”
At this point, you might be wondering how much money you can deduct. According to tax experts, you can amortize up to $5000 of the money you have spent on launching your start-up. This is only during the first year and stops once your expenses have reached $50,000.
So if you successfully launch a start-up you are allowed to deduct either the expenses you have incurred or $5000. What’s left of your start-up costs can be deducted over a 180 month period starting with the month that your business launches.
What type of costs can be amortized?
Not every expense can be deducted. Costs which quality are those which relate to your specific business and to business conditions. This can include things like market and product research to determine the feasibility of starting a certain business. Other costs can include advertising, salaries and consulting fees.
There are certain expenses which cannot be amortized. These can include incorporation expenses, interest on loans, real estate taxes and research and experimentation costs. Other costs which cannot be amortized include depreciation on assets.
What happens if the start-up fails.
Of course, amortization only comes into play if the business is actually successful. So what do you do if this happens? In the event of failure, you are not permitted to amortize your expenses.
In this case, they are considered personal expenses and are not deductible.
That being said, the money that you spent in starting or purchasing a specific business can be considered capital expenses. These expenses can be claimed as a non-business capital loss.
Also, if you purchased assets related to the business, for example, if you wanted to start a coffee shop and purchased various machinery, then you are only allowed to claim a loss once the machinery is sold.