InTents August/September 2019 - 52

business | management

Start-ups and taxes
Tax laws can help or hurt new and expanding businesses.

n today's economy, it's not unusual for
an existing event business to branch
out, or for an owner or self-employed
professional to start another business
in the same or a different ield. Few
realize, however, that Uncle Sam stands
ready to become a partner in these
efforts in the form of U.S. tax laws.
Tax laws allow the government to
not only pick up part of the expense
of branching out or starting up a new
venture, but they often allow the losses
from a secondary activity to be used
to reduce the tax bills generated by
income from self-employment, wages,
investments or the primary business.

I
Formalize entities for protection
Whether you're starting a new venture
or expanding an existing one, it may
be wise to formalize the operation
by incorporating or forming a limited
liability company (LLC). Doing this can
provide personal liability protection
and give the new operation an edge
when it comes to sales, ﬁnancing and
taxes. Keep in mind that the LLC or
incorporated new branch or start-up
won't escape IRS scrutiny under the
hobby rules.
Corporations, LLCs and limited
partnerships do offer protection to
their owners or shareholders for any
debts of the entity. But the entity's
corporate veil can be pierced if a
creditor can show the entity was the
alter ego of the owners. Sometimes it
is enough that the owners are majority
shareholders, exercise substantial
control over the incorporated
operation, or regularly use corporate
funds to ﬁnance personal expenses.

52 intents

august-september 2019

Start-up cost write-offs
In most cases, the ordinary and necessary
expenses of carrying on a trade or
business are tax deductible. Naturally,
if there is no business, there are no tax
deductions for business expenses. Special
rules exist for the expenses incurred in
starting a business.
Anyone who pays or incurs business
start-up costs and who subsequently
enters the trade or business can choose
to expense and immediately write off
up to $5,000 of those costs. However,
that $5,000 deduction is reduced dollar
for dollar when the start-up expenses
exceed $50,000.
The so-called organizational costs of
business entities are a separate class
of expense from start-up expenses,
although subject to similar rules. An

incorporated business can, for instance,
choose to deduct up to $5,000 of any
organizational expenses incurred in the
tax year business begins.
The balance of start-up or organizational expenses, if any, are amortized
(written off) over a period of not less
than 180 months, starting with the
month in which the business begins.

Branching out
Business owners and self-employed
professionals often have multiple
business activities. Common to almost
every situation is the question of whether
the new activity is merely a branch or
subsidiary of the existing business-or
will the Internal Revenue Service (IRS)
view it as a separate activity?
If the new operation is really an
extension of the original business, a
signi icant write-off is available. To
illustrate, suppose Jane Doe operates an
event planning company. The operation
is pro itable, and she decides to
establish a business at the same location
that specializes in vintage decor rental.
Jane Doe's start-up expenses amount to
$70,000 and include the cost of hiring
employees, setting up bookkeeping,
creating an operations manual and
advertising and promoting.
If this were an integrated operation,
Jane Doe's primary business could
immediately deduct the start-up costs. If
not, the rules require they be capitalized
and amortized.
InTents August/September 2019

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