Introduction
Starting a new business is an exciting and challenging journey, and it is essential to understand its tax implications. John Amos, a retired veteran, has recently formed John’s Premier Steakhouse, Inc. to operate a new restaurant. This will be his first commercial venture, and he has asked for recommendations on the taxation of various expenses he expects the corporation to incur during the pre-opening period. This memo will examine the tax treatment of start-up expenses, including when the business starts, to determine which expenses are included for John’s Premier Steakhouse, Inc.
Incentives for Small Businesses
The IRS provides a range of tax incentives for small enterprises to encourage growth and success. One such incentive is the Small Business Expensing Option, which allows small business owners to expense a portion of the cost of purchasing new equipment or property in the year the purchase is made. This can significantly reduce the tax liability of a business in its early stages, providing much-needed cash flow to invest in future growth. Another valuable incentive is the Work Opportunity Tax Credit (WOTC), which provides a tax credit to employers who hire individuals from certain targeted groups, including veterans and individuals receiving government assistance (Lanka, 2020).
John’s Premier Steakhouse, Inc. may be eligible for the WOTC if it hires veterans, providing additional tax savings and support for John’s fellow veterans. In addition to these tax incentives, John’s Premier Steakhouse, Inc. may also be eligible for other benefits, such as reduced tax rates for small business income and deductions for health insurance for the owner and employees.
Tax Treatment of Start-up Expenses
The Internal Revenue Code (IRC) section 195 guides the treatment of start-up expenditures incurred by a new business. According to this section, start-up expenditures are costs incurred in creating an active trade or business or investigating the creation or acquisition of an active trade or business (Hopkins, 2019). These expenditures may include costs associated with creating a plan or investigating the potential of a new business and any costs incurred in actually beginning the business.
It is important to note that the expenses must be incurred before the active trade or business begins to be considered start-up expenditures (Lanka, 2020). The point at which a business begins for tax purposes is determined by several factors, including the date of the first sale of goods or services, the date on which employees are hired, or the date on which the business begins advertising.
Expenses Considered as Start-up Expenditures
The following expenses incurred during the pre-opening period of John’s Premier Steakhouse, Inc. may be considered start-up expenditures (Joshi, 2021):
Licensing Fees
They incurred during the pre-opening period are generally considered capital expenditures and are subject to capitalization under the Internal Revenue Code (IRC) Section 195 (Reg 1.195-1). This means that the expenses may be spread out and deducted over a period rather than being immediately deductible in the year the expenses were incurred.
Training Expenses
Costs incurred during the pre-opening phase may be classified as either capital expenditures or deductible expenses for tax purposes, depending on the nature of the training and its intended use. If the training is deemed an essential and ordinary expense necessary for business operations, it may be deducted immediately as a current business expense under IRC Section 162. However, specific start-up costs, including training costs, may be treated as deferred expenses and capitalized under IRC Section 195.
Advertising Costs
Depending on the type of advertising and how it is used, costs made during a company’s pre-opening phase may be regarded as either capital expenditures or tax-deductible expenses. Under IRC Section 162, advertising costs may be immediately deducted as current business expenses if they are deemed an ordinary and necessary cost for the operation of the business. However, under IRC Section 195, some startup expenses, such as advertising, might be capitalized and delayed.
Amortization of Start-up Expenditures
Under IRC section 195, start-up costs must be spread over at least 60 months, starting from the month the business begins operations (Lanka, 2020). This means that the expenses will be deductible in equal amounts over five years. It is crucial to keep detailed records of all expenses incurred during this period, including receipts and invoices, to ensure appropriate documentation in case of an audit.
Conclusion
In conclusion, starting a new business such as John’s Premier Steakhouse, Inc. is a complex process with many tax implications. The Internal Revenue Service (IRS) offers various tax incentives for small businesses, such as the Small Business Expensing Option and the Work Opportunity Tax Credit, which John’s Premier Steakhouse, Inc. may be eligible for. The tax treatment of start-up expenses, such as licensing fees, training costs, and advertising costs, is guided by the Internal Revenue Code (IRC) section 195 and depends on various factors, including the type of expense, how it is used, and the timing of the expense (Reg 1.195-1). Start-up expenditures must be amortized over not less than 60 months, beginning with the month the active trade or business begins. John needs to maintain comprehensive records of all expenses incurred before the business officially opens to ensure proper documentation in the event of an audit.
References
Hopkins, B. R. (2019). The law of tax-exempt organizations. John Wiley & Sons.
Joshi, V. (2021). Start-up to Scale-up: Entrepreneur’s guide to Venture Capital. Notion Press.
Lanka CMA, M. (2020). Tax Treatment of Business Expenses. The Contemporary Tax Journal, 9(2), 64-68. Web.
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