When you are thinking about starting a business or acquiring an existing business, you may incur costs before you make the decision to go into business. For example, you may have expenses to investigate the possibility, such as market studies, or you might pay professionals to do an evaluation. How you handle those costs for tax purposes depends on whether or not you decide to actually start up the business or acquire a business.
According to the IRS, if you do not go into business, the costs you incur as an individual before deciding to start a business or purchase a business are considered personal expenses and are not deductible. But the costs you incur in your attempt to actually start or acquire a specific business are capital expenses and you could deduct them as a capital loss.
If you currently have a business set up as a corporation and you unsuccessfully attempt to go into a new trade or business, you could deduct all the investigatory expenses as a loss.
If you purchased any assets during your process of attempting to start or acquire a business and you decide not to go ahead with the business, you could only recover the cost when you eventually sell or dispose of the assets. At that time you could have either a capital gain or loss.
If you decide to go into business, your start-up costs could be deductible in the year you start the business, or you could amortize the costs. According to the IRS, you can elect to deduct up to $10,000 in business start-up costs (for tax years starting in 2010). The current year deduction is reduced dollar for dollar if the total start-up costs are over $60,000. You can elect to amortize the qualifying start-up costs you do not deduct in the current year over a period of 60 months.
In the case that you decide to go into business, the start-up costs would include the costs you incurred in investigating the creation or acquisition of an active trade or business. The IRS provides some examples of start-up costs, which include analysis or surveys of potential markets, products, labor supply, and transportation facilities; advertising; salaries and wages for training employees including their instructors; travel and other costs to secure prospective customers, suppliers and distributors; and fees for consulting and other professional services.
If you are attempting to acquire an active business, your start-up costs would include the costs of a general search for a business and a preliminary investigation of the business. Once you decide to attempt to acquire a specific business, the costs you incur from that date on would be capitalized as part of the cost of the business.
Sources:
Business Startup Expenses, Business Owner’s Toolkit
Peter Jason Riley, Deducting Business Start-Up and Expansion Expenses, Riley Associates P.C.
Publication 529, Miscellaneous Deductions, IRS
Publication 535, Business Expenses, IRS