||Ask the Small Biz Adviser
Dear Small Biz
I have spent almost $50,000 in the last five months in organizing
a company. I've shown a loss each month, since I did not yet have
product to sell. I spent money preparing the logo, packaging, point
of sale system, consulting fees, accounting statements and setting
up an office. Is there a way to capitalize these costs so I do not
have to show a loss? Can I convert the money to contributed capital
(paid in capital)?
It appears there may be a lack of knowledge on your part regarding
the financial issues related to starting and operating a business.
I hope you conducted some business planning before starting the
One of the primary elements of a business plan, simple
or complex, is to establish the startup costs. These are the costs
associated with the purchase of equipment, inventory, office supplies,
legal services, incorporation, utility and lease deposits and so
forth before opening the doors to generate profit.
All costs associated with the development and startup
of a business venture can be capitalized on your balance sheet in
the form of organizational costs. They are fixed (long-term) assets
that can be amortized over a period of three years. These costs
must be typical to those associated with the startup of a venture
in your particular sector.
In addition, all cash funds you personally expend
and any tangible assets you convert from personal to company ownership
can be capitalized in the net worth of your balance sheet. Again,
the monetary value of tangible assets must be a fair market value
for the item based on its years of use, the same depreciation method
for all such items and an equitable salvage value if the age of
the asset exceeds normally accepted time periods. I suggest you
review one or more of the following Internal Revenue Service publications
946 examines how to depreciate property. It even provides
details on the types of property you can depreciate and the various
mathematical methods. Readers who have placed property in service
before 1987 also should examine Publication
463 addresses automobile depreciation.
535 demonstrates how the depreciation expenses are defined
as business expenses and deducted from income before taxes.
No profit means
Then there is the matter of net profit and loss. I assume,
as with most small businesses, your tax year starts each Jan. 1
and ends Dec. 31. Therefore, you will have a net loss for the fiscal
year ending Dec. 31, 2002. Granted, you want to make money, but
the net loss also translates to no company income taxes for 2002.
Given the fact you will have a net loss for this fiscal
year, I strongly urge you to familiarize yourself with the matter
of self-employment tax. IRS
Publication 533 is an excellent primer on the topic. Assuming
a loss, you will not be liable for self-employment tax if there
is no compensation in 2002. But if you compensate yourself in 2003,
there must be accountability for the Social Security and Medicare
payments. They are made quarterly, but if the first full year of
operations does not begin until 2003, you can then make those payments
no later than April 15, 2004.
In closing, develop a close relationship with your
accountant, and consider taking a form of abbreviated course on
the basics of accounting and finance. Many community colleges offer
adult and continuing education courses, while Small
Business Development Centers and SCORE
offer shorter workshop formats.
I wish you well.
-- Posted: Dec. 3, 2002