What Are Taxable Start Up Costs

Business By DALIG Updated 4 Jul 2011 , 4:08pm by smbegg

DALIG Posted 3 Jul 2011 , 10:40pm
post #1 of 11

I am sorry but i dont know how to quote, but i remember that -smbegg- on her post -Future Texas decorators: help on setting up- said that we need to save all the receipts for start up costs since we can use for taxes. but i am wondering what are the start up costs, and when do i have to start saving them since the new law starts on september 1st. and we need to get ready now. I mean i have a lot of cake decorating things right now from ingridients to tools and i would like to know what else should i buy to start up.
Thank you

10 replies
jason_kraft Posted 3 Jul 2011 , 11:38pm
post #2 of 11

You can typically deduct any ordinary and necessary expense related to starting your business against income taken during the same year. Start saving receipts ASAP, and if you aren't hiring an accountant you may want to invest in a program like QuickBooks that can be used to track business expenses and income. FYI you may also be able to deduct 50-100% of the cost of business meals where you spend at least some time discussing business-related topics, so save restaurant receipts as well.

More info on deductible expenses from the IRS:
http://www.irs.gov/businesses/small/article/0,,id=109807,00.html

You probably don't need to worry about the inventory valuation or capitalization topics in the above link. And as long as you have under $5000 in startup expenses you can deduct them immediately against current year income, above $5K the deductions need to spread out (amortized) over 15 years. This $5K limit only applies to startup costs, not ongoing operating expenses.

http://sbinformation.about.com/od/taxes/a/Topdeduction_ga.htm

http://www.businessknowhow.com/money/startuptax.htm

tokazodo Posted 4 Jul 2011 , 12:02am
post #3 of 11

A start up cost is anything you have put in your 'bakery', to start your business, cake pans, mixer, utensils, license fees, etc... It probably wouldn't be a bad idea, just starting out to get a good inventory list of what you have for your business. Some of the stuff you may already have, it's not necessarily stuff you go right out to purchase new.
You can also deduct mileage for delivery, or going to the grocery store or where ever you go to purchase baking supplies. (this is not included in start up cost, it will be on another item line during tax time)


As Jason Kraft said, you may want to speak to an accountant. A good accountant will steer you in the right direction. When it comes to tax time, I feel a good accountant is worth the cost. (also a business deduction) thumbs_up.gif

DALIG Posted 4 Jul 2011 , 3:17am
post #4 of 11

thank you guys so much for your replies this was so helpful and i will start doing some more research and try to find a accountant to help me. Thank you

tavyheather Posted 4 Jul 2011 , 3:56am
post #5 of 11

In CA anyway I have heard two things (which may help you...)

Custom cakes are a non-taxable item (meaning no need to charge sales tax to customer)

You need a business license to deduct anything...meaning you expense a lunch on july 4th and get your business license july 5th, the lunch is NOT a write-off. <---am I correct on this one? it's been a while since I checked

smbegg Posted 4 Jul 2011 , 4:20am
post #6 of 11

We do not need business licenses to be home bakers in TX.

I purchased a new oven and fridge, I am replacing my cabinets and counters, and redoing an extra room for my decorating room. I am going to write all these things off, plus the purchase of my work tables, Bakers racks, and other misc supplies that I am purchasing.

Here s what I found (for texas) on the whole startup and depreciation.

Business start-up costs are the expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting. They may include costs for advertising, travel, surveys, and training. These costs are generally capital expenses.
You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining cost must be amortized.
For more information about amortizing start-up and organizational costs, see chapter 7 in Publication 535.
Depreciation
If property you acquire to use in your business has a useful life that extends substantially beyond the year it is placed in service, you generally cannot deduct the entire cost as a business expense in the year you acquire it. You must spread the cost over more than one tax year and deduct part of it each year. This method of deducting the cost of business property is called depreciation.
Business property you must depreciate includes the following items.
  Office furniture.
  Buildings.
  Machinery and equipment.
You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. This deduction is known as the section 179 deduction. You can take a special depreciation allowance for certain property you acquire and place in service before January 1, 2005. For more information about depreciation, the section 179 deduction, and the special depreciation allowance, see Publication 946, How To Depreciate Property.

This is info on deductions for using your home:
Business Use of Your Home
To deduct expenses related to the business use of part of your home, you must meet specific requirements. Even then, your deduction may be limited.
To qualify to claim expenses for business use of your home, you must meet both the following tests.
1.  Your use of the business part of your home must be:
a.  Exclusive (however, see Exceptions to exclusive use, later),
b.  Regular,
c.  For your trade or business, AND
2.  The business part of your home must be one of the following:
a.  Your principal place of business (defined later),
b.  A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or
c.  A separate structure (not attached to your home) you use in connection with your trade or business.
Exclusive use. To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition.
You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes.
Exceptions to exclusive use. You do not have to meet the exclusive use test if either of the following applies.
1.  You use part of your home for the storage of inventory or product samples.
2.  You use part of your home as a daycare facility.
For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers).
Principal place of business. Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements.
  You use it exclusively and regularly for administrative or management activities of your trade or business.
  You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.

jason_kraft Posted 4 Jul 2011 , 9:59am
post #7 of 11
Quote:
Originally Posted by tavyheather

You need a business license to deduct anything...meaning you expense a lunch on july 4th and get your business license july 5th, the lunch is NOT a write-off. <---am I correct on this one? it's been a while since I checked



You do not need a business license to deduct business expenses. I don't know if business meals are deductible to offset hobby income (revenue generated from non-business activity) but you can deduct actual hobby expenses (like the cost of ingredients) to bring taxable hobby income down to zero. Unlike a business, you can't take a loss on your hobby to offset income from other sources.

IRS info on businesses vs. hobbies:
http://www.irs.gov/newsroom/article/0,,id=169490,00.html

Plus if you are operating a business illegally (i.e. no license and no inspection in states without cottage food laws) you still must report and pay tax on income to the IRS, and business expenses would apply in that situation.

costumeczar Posted 4 Jul 2011 , 12:24pm
post #8 of 11

Watch out for home office business deductions. Those are the ones that tend to be done incorrectly and trigger the most audits, so far as I've heard. I use Turbotax to do my taxes for my home business and there's an entire section in there about that topic, it's pretty strict and excludes a lot of what people would be trying to deduct.

MimiFix Posted 4 Jul 2011 , 2:00pm
post #9 of 11

There is some excellent advice above. But to clarify a point: A home-based food business that uses the home kitchen for production, is not allowed to deduct the use of the kitchen or any purchases that are also used for personal needs.

The IRS uses two words to meet the test for deductible. As stated above in smbegg's excellent post, the words are "regular" and "exclusive." So, for example, if your home kitchen is used for production, you may not deduct the cost of a new oven or new kitchen table since you also use those for your family.

If you have a separate kitchen on your property, then you can deduct most expenses.

Spuddysmom Posted 4 Jul 2011 , 2:49pm
post #10 of 11

This is exactly the info I was looking for also - thanks for posting! The new WA cottage food law goes into effect at the end of this month (although our HD seems sort of "bedazzled and confused" by the changes at this point). I'm waiting to see exactly what changes I need to make in my kitchen to meet the standards - been given a variety of answers - at least these links will keep me busy while they get their act together. Quickbooks the best way to go if you don't have an accountant?

smbegg Posted 4 Jul 2011 , 4:08pm
post #11 of 11
Quote:
Originally Posted by tavyheather


You need a business license to deduct anything...meaning you expense a lunch on july 4th and get your business license july 5th, the lunch is NOT a write-off. <---am I correct on this one? it's been a while since I checked




In what I posted it says that the set up costs are anything that is inccured BEFORE opening.

As to expenses when opening, you need to check with an accountant as you can easily trigger audits (something I want to avoid like the plague!

I am also remodeling a room in the house for sole purpose of a bakery. I won't be baking or washing dishes in there, but I will do everything else. This is especially important because I have dogs and want a sterile environment. I will be able to write this portion off.

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