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 Dear Tax Talk:
My husband is starting a business in 2008, but started making equipment purchases in 2007. Can we deduct these costs on
our 2007 taxes?
-- Seanna
 Dear
Seanna,
Generally you cannot deduct the costs of starting up a business. Startup costs are amounts paid or incurred for creating
an active trade or business or investigating the creation or acquisition of an active trade or business.
For costs paid or incurred after Oct. 22, 2004, you can elect to deduct a limited amount of startup
and organizational costs when the business activity commences. The costs that are not deducted currently can be amortized
ratably over a 180-month period beginning in the month that the business begins activities.
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| Startup costs include: |
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An analysis or survey of potential markets, products, labor supply, transportation facilities, etc. |
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Advertisements for the opening of the business. |
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Salaries and wages for employees who are being trained, and their instructors. |
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Travel
and other necessary costs for securing
prospective distributors, suppliers
or customers. |
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Salaries and fees for executives and consultants, or for similar professional services. |
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If your total startup costs are less than $50,000, you can deduct up to $5,000 of these costs currently
when the business activity commences, and amortize the balance over 180 months. The election is made by attaching a statement
to your return in the year the business commences and specifying the costs incurred and explicitly stating that an election
is being made to amortize/deduct the costs.
Small equipment purchases would
be considered part of your startup costs. Larger
equipment purchases are subject to depreciation
once the asset is placed into service. Placed
into service means that it is available for use
its specific use in a business activity.
Since the business wasn't in place
until 2008, depreciation cannot commence prior
to that date. Similarly, you cannot claim a Section
179 write-off of equipment until the property
is placed into service. A Section 179 write-off
allows small business owners to avoid depreciation
deductions and allows a full write-off of up to
a certain amount of equipment purchases in the
year the property is placed into service.
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