Question

1. How do corporations treat start-up expenditures?

Answer 1

Expenses incurred in preparing to open a new business are deducted over 180 months, rather than all at once as they would be if the business were already operating. Typical costs include investigating whether to open a business, ordering supplies needed, and training employees.

Investigating the potential for a new business and getting it started can be an expensive proposition. However, you can't deduct these expenses under the general rules for business deductions because only expenses for an existing trade or business can be deducted. And, by definition, you incur your start-up expenses prior to the time that your business is born.

Fortunately, there is a way around this dilemma. If your start up expenditures actually result in an up-and-running business, you can:

• Deduct a portion of the costs in the first year; and
• Amortize the remaining costs (that is, deduct them in equal instalments) over a period of 180 months, beginning with the month in which your business opens

How Much Can You Deduct in the First Year?

You are able to deduct up to $5,000 of your qualifying start-up costs, although the first-year deduction starts to phase-out when your expenses reach $50,000.

If your start-up efforts end in the creation of an active trade or business, then on your tax return for the year the business commences, the amount of expenses that you can deduct will be the lesser of:

1. Your actual expenses with respect to the new business; or
2. $5,000, reduced by the amount by which the start-up expenditures with respect to the active trade or business exceed $50,000

The remainder of your start-up expenditures is deducted ratably over the 180-month period beginning with the month in which the active trade or business begins.

What Costs Qualify?

Investigation expenses that qualify include those relating both to business conditions generally, and those relating to a specific business, such as market or product research to determine the feasibility of starting a certain type of business. The costs of checking out the various factors involved in site selection would also be an amortizable investigation expense. In addition, the costs of creating a business include advertising, wages and salaries, professional and consultant fees,

What Costs Don't Qualify?

The following costs don't qualify for the first year deduction and 180-month amortization:

• Incorporation expenses cannot be deducted as start up costs. However, they may be deductible as incorporation expenses
• Start-up expenditures for interest, real estate taxes, and research and experimental costs that are otherwise allowed as deductions do not qualify for amortization. These costs may be deducted when incurred
• The costs attributable to the acquisition of a specific property that is subject to depreciation or cost recovery do not qualify for amortization. Instead, the property should be depreciated under the appropriate rules

What if You Don't Start the Business?

If you ultimately decide not to go into business, what happens to your costs? The portion of costs you paid to generally investigate the possibilities of going into business at all, or to purchase a non-specific existing business, are considered personal costs and are not deductible.

However, the total costs that you paid in your attempt to start or purchase a specific business would be considered a capital expense and you can claim it as a capital loss, subject to all the rules that apply to a nonbusiness capital loss.

If you purchased any business assets along the way (for instance, some bagel-making machinery), you can claim a loss only if and when you sell or dispose of the property.