If you started a company in 2020, congratulations! You put a lot of thought and hard work into making your vision a reality. Of course, one of your top priorities is tracking your spending. Since the year is nearly half done, you must be sure to review your organizational expenses. This number will affect the amount you can deduct on your tax return for your first year in business.
If you want to hire an accounting professional to ensure your organizational and other expenses are properly recorded, get in touch with Alliance Resource Group, a leader in executive recruitment solutions.
Defining Organizational Expenses
Organizational costs are incurred in relation to setting up a business. Examples include costs associated with a survey to review potential markets, holding organizational meetings, filing fees with the applicable state government, ordering necessary supplies, and training employees to perform tasks. Other examples include advertising, wages, and salaries, and professional and consultant fees. Because organizational costs are incurred when a subsidiary is created, these costs can be repeatedly incurred over the life of the parent company.
Capitalizing Organizational Expenses
Depending on applicable tax rules, you may be able to capitalize on organizational costs. If so, you deduct a portion of the costs the first year and amortize the remaining costs over 180 months.
Deducting Expenses in the First Year
In the first year of your business, you can deduct up to $5,000 of qualifying startup costs. This deduction starts to phase out when your expenses reach $50,000. If you successfully create an active business, the number of expenses you can deduct for the first year will be the lesser of your actual expenses with respect to the new business or $5,000, reduced by the amount expenditures exceed $50,000. The remainder of start-up expenses is equally deducted over 180 months, beginning in the month your business became active.
Calculating the Organizational Expense Deduction
After determining your amount of qualifying expenses, calculate how much can be deducted in the current year. If you have more than $50,000 in expenses, reduce the $5,000 maximum amount by $1 for each $1 over $50,000 in organizational expenses. For instance, if you have $55,000 in expenses, they all must be amortized over 180 months. Next, calculate the monthly amortization amount. Subtract the amount of your first-year deduction from the total expenses. This is the amortization amount. Divide this amount by 180 to determine the monthly deduction. Then, calculate how many months of amortization can be claimed for the first year your business was active. The amortization period begins with the month your company began operating. The amount you can amortize is the number of months your business operated times the monthly amortization amount.
Hire an Accounting Executive
To make sure your organizational expenses are properly reviewed, hire an accounting executive through Alliance Resource Group. We provide highly qualified subject matter professionals who have been personally interviewed and vetted and are ready to get to work. Contact us today.
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