If you are starting a new business, or considering starting a business, there are some important tax considerations for start up expenses. We will take a look at the basic rules covering the treatment of these expenses on you tax return.

The Internal Revenue Code allows a deduction for trade or business expenses on a tax return. This deduction is limited to expenses incurred while a taxpayer is “carrying on” a business. The term “carrying on a business” is not strictly defined in the tax law. A general rule of thumb is that the business has a product or service ready to sell and has revenue from operations.

Any expenses that are incurred in any year before the business begins operations are considered business start-up and organizational costs. These expenses are not deductible at the time they are paid, because the business has not begun operations. That does not mean that the expenses are lost for the prospective new business owner, however there are special rules about how and when to deduct these start-up expenses.

The first thing to keep in mind about the deduction of start-up expenses is that no deduction is allowed until the business begins operations. The way that the expenses are deducted is also a little different than what many people expect. You cannot simply add the start up expenses to any other expenses of that type that you have after the business gets going. The method for the deduction of these expenses changed in 2004.

Start-up expenses that were incurred before October 23,2004 had to be amortized. That means divided over a set number of months. The old rule set the time period for amortizing the expenses at not less than 60 months, beginning with the month the business began.

The American Jobs Creation Act of 2004 changed the method for deducting start-up expenses and organizational costs. The new rules apply to expenses paid after October 22, 2004. Under the new rules you can elect to deduct up to $5,000 of start-up and $5,000 of organizational expenses in the taxable year that the business begins. This deduction is reduced by the amount the amount the start-up or organizational expenses exceed $50,000. Any expenses that are not deducted in the year the business begins are amortized over 15 years.

This is a general over-view of the rule regarding business Start-up expenses. The issues can get a bit complicated and everyone’s circumstances are different. We recommend that you discuss you situation with you tax advisor.