How to deduct start-up costs?

I paid for web-site hosting in December 2006 so I could develop a website to sell a product. I worked on the website and went live in early 2007. I did not file a 2006 tax return as I didn%26#039;t have any real business activity, just start-up costs. I did apply for an EIN in Dec %26#039;06 in order to open a bank account. I put the start date of the business as 12/06. Now I am doing my 2007 tax return for the business which was profitable in 2007. According to Publication 535, start-up costs up to $5,000 are deductible. However, how do I do that? Do I just run the whole expense amount through 2007 expenses? What about the beginning balance sheet for 2007? My partner and I did put in capital and have cash at the end of 2006, but as this is my first return, do I just put down zero at the beginning of the year and show the capital contribution happening during 2007 or do I put a beginning balance down even though no return was required to be filed in the prior year?

How to deduct start-up costs?

Record the capital contributions and call the web-site hosting a %26quot;prepaid expense%26quot;; i.e., debit cash and credit capital, debit prepaid expenses and credit cash in 06. In 07, debit development costs (an expense) and credit prepaid expenses. You%26#039;ll have plenty of justification for this given the concept of matching revenues and expenses. You had no revenue in 06, so you deferred the expense until you did. And if the service asks, tell them you had no taxable activity, only organizational, in 06 and they%26#039;ll go away.

How to deduct start-up costs?

Well, it seems that you have a problem.

First, I assume that you realize that you have a partnership; and, thus you have to file a form 1065. Now where you got this idea that no return was required for 2006 I have no clue! But it isn%26#039;t a correct assumption.

Here is a copy of the basic rule directly from the IRS.....

Must a partnership or corporation file a tax form even though it had no income for the year?

A domestic partnership must file an income tax form unless it neither receives gross income nor pays or incurs any amount treated as a deduction or credit for federal tax purposes....

References:

Publication 541, Partnerships

Form 1065 Instructions, U.S. Partnership Return of Income

Okay, you filed for a EIN in 2006 and stated the business started on 12/06. Therefore you had to have a partnership at that time or the EIN isn%26#039;t valid. You also paid start up cost in 2006. Yes, you should have filed a 1065 for 2006.

Now, the rules state that you may elect to deduct $5000 in start-up cost as an expense. In the first year by simply taking the expense on a timely filed return including extensions. Or by filing an amended return within 6 months (not including extensions).

Well neither of these things happened. So at this point to be 100% legal you should file a 2006 1065. And, you will have to amortize the start-up cost over 60 months. You will also need to admend your 2006 1040.

This should also answer your question about the balance sheet. At the start of 2006 everything is 0 and then whatever the numbers were at the end of 2006 and the ending numbers carryover to 2007.

Now, this is not that bad. It simply means you will have a loss last year (that will offset your normal income). And hopefully as the business grows the amortization will offset income in the next 5 years.

Sorry to be the bearer of bad news. But hope it helps.

Edit: What botygy suggests is called creative accounting. The principal of matching expense to income does not apply in this case. And, furthermore that would lock you into using the accural method of accounting. It still wouldn%26#039;t change the tax liability it would simply limit your choices.

I have been an Enrolled Agent for a long time. And, from the wording of the response I would say that botygy is a CPA or about to be one. Only talked about debits and credits...not the actual tax law. Most CPAs aren%26#039;t tax experts. I have made a very good living fixing mistakes made by CPAs and lawyers.

Now will the IRS make a big deal out of this...more than likely they won%26#039;t...but they always have that option.

Other Replys:Not filing the 2006 return is a bit of a problem, but you can file that late (now!). If you hadn%26#039;t gone live until 2007 you should be ok electing to amortize start up costs when your business started in 2007. I put a written election like this in the return, rather than just including the expense (a written election makes your intent clear)

%26quot; The partnership elects, under Section 709(b) of the Internal Revenue Code, to deduct $5000 of start up costs in the first year and to amortize its remaining start up costs over a period of 180 months beginning January 2007, the month in which business commenced.

The 180 month code change took place in 2004, so you will see a lot of refernces to five year amortization periods if you are reading older reference materials.