The money you spend for assets to start or improve a business is considered an investment. Normally, you must capitalize these expenses, which means you can recover them only when you sell the asset. For some costs, you can reap tax breaks while you hold onto the assets to which the costs were borne. If you're dealing with assets you don't touch or feel physically, you amortize, or deduct, an equal portion of the costs over a period of years.
The decision to amortize depends on whether you want or need the tax benefits immediately. By spreading out your expenses rather than taking them all upfront, you're more likely to match the costs to the revenues. You can write off only up to $5,000 in the year you incur them -- so long as your costs do not exceed $50,000. The current business expense deduction is reduced for each dollar above $50,000 you spend on start-ups. If start-up costs are $55,000 or more, you would need to amortize to get any tax benefit.
Starting or Buying Businesses
Certain costs of starting or acquiring a business are eligible for amortization. These include surveying your possible markets, labor force and products; advertising the grand opening; traveling to recruit customers, suppliers and distributors; and consultants' services. If you're purchasing a business, you can amortize what you spent to gather information on the business, such as the lawyer's and accountant's analysis of the industry, financial projections and search of property. Start-up costs also include fees for incorporating your enterprise or preparing a partnership agreement. The amortization period is 15 years.
You may amortize for 15 years certain intangible, or non-physical, assets that you acquire as part of another business' assets. Intellectual property such as copyrights, trademarks and patents that you bought from the prior holder -- not what you created -- fall in this category. Other intangibles include your business' reputation, also known as goodwill; product formulas, government licenses or permits to conduct business; agreements for former employees or co-owners to not compete against you; franchise, trademark or trade name; and customer lists. The costs of designing your business website, the domain name and rights to use another's land, air or water are also amortizable.
Trial and Error
Your research and experiment expenditures on a possible invention, product, formula, process or method of production are amortizable for 10 years. To treat an activity as research or an experiment, you must engage in it because you otherwise don't know how to develop or design the product. If you decide to amortize rather than write off all of the costs in the year you incur them, you cannot take a lump-sum deduction in a later year unless you get the Internal Revenue Service's blessing.
- Internal Revenue Service:Publication 535 -- Chapter 8 -- Amortization
- Internal Revenue Service: Small Businesses & Self-Employed: Intangibles
- Internal Revenue Service: Instructions for Form 4562
- U.S. Small Business Administration: Community -- Startup Cost Tax Deductions – How to Write Off the Expense of Starting Your Business
- American Bar Association: Business Law: Chapter 1 -- Goodwill and Intangible Assets
- Internal Revenue Service: Publication 535 - Chapter 7 -- Costs You Can Deduct or Capitalize
- University of New Hampshire Extension: Agriculture Handbook 718 -- Operating Expenses and Carrying Charges
Christopher Raines enjoys sharing his knowledge of business, financial matters and the law. He earned his business administration and law degrees from the University of North Carolina at Chapel Hill. As a lawyer since August 1996, Raines has handled cases involving business, consumer and other areas of the law.