Small Business gets a Break on Start Up Expenses
When and how do I deduct expense incurred
before I opened my business?
Most new business
and rental property owners will pay or incur expenses for investigating the
viability of a business and expenses before actually opening the business or
renting the property. These expenditures
are known as startup costs and examples include analysis of potential markets
and products, advertisements for the opening of the business, salaries and
wages for training and education, and other expenditures that would normally be
deductible if the business were open. These costs are covered in Internal
Revenue Code 195 expenditures and have specific rules on when and how a tax
deduction is elected.
The law requires
these costs to be capitalized and not automatically deductible in the current
year as a periodic cost. However, an
election may be made to expense up to $5,000 of these costs in the year in
which the business opens. This $5,000
deduction is reduced dollar for dollar once startup costs exceed $50,000. Thus
if start up expenditures exceed $55,000 no deduction is allowed. The election
is made on Part IV of Form 4562 and is due by the date of the return including
extensions. The remaining balance of
startup expenses must be amortized over 15 years or 180 months. If the trade or
business is disposed of before startup expenses are fully amortized the
remaining g costs may be deductible in the year the business closes.
The organization
costs of business entities are often confused with startup expenses. Although
there are similarities in how they are treated by the IRS they should be
segregated. The IRS considers these
expenses a separate cost and consequently a separate election is made for
organizational costs.
Electing to
deduct all or portion of startup expenses depends on the particular situation
of the business, the owners of the business, and future operations. You should
always speak with your trusted advisors about your particular situation.
Energy Credits
Energy Efficient Tax Credits
The fiscal cliff
bill also known as the American
Taxpayer Relief Act of 2012 extended certain tax credits for energy efficient
purchases made in 2012 and 2013. Due to
this late change by Congress the IRS is currently updating their Form 5695 and
e-file computer systems. They recently announced they do not anticipate being
able to accept returns with this credit until late February or early March.
The most common credit is
for improving the energy efficiency of your principal residence. The items considered for this credit included
purchases made for biomass stoves, HVAC equipment, insulation, roofs, water
heaters, windows and doors, and other improvements to the envelope or shell of
the home. A building envelope is generally defined as any insulation or system
that is designed to prevent heat loss or gain. The most common is a metal roof
with certain pigmented coatings or asphalt roof with certain cooling granules. This credit is generally 10% of the purchase
price and in some cases labor for installation. The annual credit limit for
windows is $200, $150 for a furnace or boiler, and $300 for most other items.
There is a lifetime maximum credit of $500 and is a nonrefundable credit with
any unused amount being carried forward to subsequent years.
Another credit that is
becoming more popular is the use of alternative heating and cooling systems. These include solar energy systems, wind
turbines, and geothermal heat pumps.
These tax breaks do not expire until December 31, 2016. The credit is
generally 30% of the cost of the eligible property and is also nonrefundable.
In general terms if you use the sun, the wind, or the ground to provide
electricity or to heat your home you could be eligible for the credit.
A question I often get asked
is the use of energy efficient appliances. Currently there is no income tax
credit in place for use of these appliances in your home.
More detailed information on
the available credits may be found at www.energystar.gov.
Qualified joint ventures
Treatment of Business
Owned Jointly by Husband and Wife
Based on the definition of a partnership, an unincorporated business
entity owned by two individuals, including spouses in non-community states,
should file an annual partnership return. After years of complaints from
practitioners and business owners Congress changed the law in 2007 with the
Small Business and Work Opportunity Tax Act. Because of the Act a
business owned by only a husband and wife could elect to allocate the income on
their joint return and avoid filing a partnership return. The term
given to this type of business was “Qualified Joint Venture” (QJV). In addition
to being only owned by husband and wife, both spouses must materially
participate, and file a joint return.
The consequence of this election is that the husband and
wife must file and report their share of income and expense according to the
percentage of ownership on Schedule C or F if it is a farm. There was not clear
guidance in the Act on whether this election applied to rental properties
normally reported on Schedule E and its impact on self-employment taxes. There
still has not been any formal guidance on this subject, but the IRS Chief
Counsel issued CCA 200816030 in 2008. In this advice the chief counsel stated
that electing QJV for rental property did not convert the income to
self-employment income, but that the rental property should be reported on
Schedule C.
While some guidance was issued regarding rental properties
there remains some question on the treatment of husband and wife LLCs. The Code does appear to be unclear if an LLC
qualifies for this election and no formal guidance has been issued. However,
the IRS did put some information on its website to help taxpayers and
practitioners. While the article on their website has no legal authority it
does give us an idea how they interpret the statuary language. The article advises that a QJV election is
not available when there is a separate legal entity. This would seem to rule out limited liability
companies formed under state law. Again there is no legal authority for this
IRS article, but one should consider if it would be worth the time and costs to
fight the IRS on the matter, especially considering that there are steep
penalties for the non-filing of partnership returns.
A taxpayer must also consider state laws and requirements
and whether the allocating of income for federal purposes must be combined for
state income tax purposes. Often a QJV
falls under the rules have a unitary business group and must be reported as one
entity.
Due to the IRS guidance and sometimes complicated state laws
it is generally my recommendation to file a partnership return even if you meet
the definition of a QJV, especially if you are an LLC.
Start of tax season delayed until Jan. 30 at the earliest!!!
The IRS announced on Tuesday that it plans to open the 2013 filing season on January 30 for "some" taxpayers.
The opinion of many is that most businesses and individuals will not be able to file until February or March. This is likely true for those that have depreciation expenses, residential energy credits, or have other general business credits.
Oh this is going to be fun!
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