The Law Offices of H. Jacob Lager

BUSINESS PLANNING

How do I treat my start-up expenses?

If you've recently started a business, or if you're in the process of starting one now, the way you treat your initial expenses can significantly impact your tax position.

Generally, expenses incurred before a business begins will not generate any current deductions.

However, are entitled to write off "start-up expenses” over a period of 60 months or more that begins with the actual start of the business.

Start-up expenses include, with a few exceptions, all expenses incurred to investigate the creation or acquisition of a business, to actually create the business, or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the election, an expense also must be one that would be deductible if it were incurred after the business actually began. One example of a start-up expense is the cost of analyzing the potential market for a new product.

If you plan on forming a corporation or a partnership as part of your business plan, a similar 60-month-or-more-write-off election is available for the entity's “organization expenses.” To qualify, the expense must be incident to the creation of the corporation or partnership, be an expense that, in the absence of the election, would be capitalized, and be an expense that, if it had been incurred in connection with a corporation or partnership that had a limited life, would have been eligible to have been written off over that limited life. Such organization expenses include legal and accounting fees for services related to organizing the new entity as well as governmental filing fees.

If you have any questions about your start-up expenses or how to make the elections that will entitle your new business to the 60 month write off period, please contact our office.

How do I deduct expenses attributable to my home office?

If you own your own business and work from a home office, you should be aware of the rules that determine whether you will be entitled to a deduction for your home office expenditures.

You will generally be entitled to deduct home office expenditures if you meet any of the following three tests:

1. The "separate structure test": To satisfy this test, your home office expenditures must relate to the costs of a separate unattached structure on the same property as your home—for example, an unattached garage, artist's studio, workshop, or office building. The separate structure must be used exclusively and on a regular basis in connection with your business.

2. The "place for meeting clients test": You will satisfy this test if you use the home office exclusively and on a regular basis, to physically meet or deal with patients, clients, or customers in the normal course of your business. Receiving telephone calls from your clients in your home office will not satisfy this test.

3. The "principal place of business test": You will satisfy this test if if you use your home office exclusively and on a regular basis, as your principal place of business.

Your home office will qualify under this test if you use the home office exclusively and on a regular basis to conduct administrative or management activities of your business, provided that you don't have another fixed location where you conduct substantial administrative or management activities.

Your home office will also qualify under this test if, after comparing the relative importance of the activities performed at each of your business locations and after comparing the amount of time spent at each such location, your home office can be demonstrated to be your principal place of business. However, it is possible that after making these comparisons, the IRS will determine that no particular location is your principal place of business and deny your home office deductions.

Assuming you successfully establish a home office, there are further rules that describe your ability to use such deductions, as well as rules governing the effect of such deductions on the later sales of your principal residence.

If you have any questions about the tax consequences of operating a home office, please contact our office.

The Law Offices of H. Jacob Lager
1601 Cloverfield Blvd.
Second Floor, South Tower
Santa Monica, CA 90404

(310) 471-8773 phone
(310) 943-1545 fax

Email: jake@lagerlaw.com

The information available on this website is meant to provide general information and does not constitute any advice relating to your particular situation.