Now that we know the information that has to be gathered and reported to the government, let's look at the bookkeeping procedures necessary to produce the data to do that.
You can deduct business expenses on your income tax return. These are the current operating costs of running a business. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business, trade, or profession. A necessary expense is one that is helpful and appropriate for your business, trade, or profession. An expense does not have to be indispensable to considered necessary.
The following are brief explanations of some expenses that are of interest to people starting a business.
Business Start-Up Costs
Business start-up costs are the expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting. They may include costs for advertising, travel, surveys, and training. These costs are generally capital expenses.
You usually recover costs for assets that have a standard life of more than a year (such as machinery or office equipment) through depreciation (discussed next). You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 29, 2004. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining cost must be amortized (spread-out) over 15 years.
Start-up costs are expenses connected with setting up or investigating the creation or purchase of a trade or business. These expenses occur before the trade or business begins operations. Start-up costs must be capitalized because they are not incurred in carrying on a trade or business. They include (among others):
- Survey of potential markets
- Advertising the opening of the business
- Consulting or other professional fees paid in connection with starting a business
- Wages to employees being trained for the new business
- Analysis of possible facilities, labor force, supplies, etc.
- Travel and related expenses to secure distributors, suppliers and customers
Organizational costs are expenses incurred in formative and launch stages of your business. They include (among others):
- Attorney's fees
- State Incorporation costs
- Local occupational licenses
- The cost of temporary directors
- The cost of organizational meetings
More information about amortizing start-up and organizational cost can be found in Chapter 7 of IRS Publication 535.