Technically speaking, you can’t realize and list your tools and equipment expenses and deductions as business expenditure before you even embark on starting your business. If you do that, the IRS will rightly think that you are ready to market your goods and services.
However, it is also a truism that in the eye of many business owners, all the events leading up to the day that you actually start your business does cost a lot of money. So, is it alright to start calculating your deductions such the costs involved in starting up a business or investing in all the preparations that lead to opening your doors to commerce?
Previously Purchased Equipment
And what about the equipment you bought before even thinking about starting your own business, for example, an expensive camera – can you write that off as a business expense? Fortunately for you, there is a good chance that you can write a portion of those expenses off as business expenses.
However, keep in mind that it will take a bit of time to realize the benefits of doing so. In light of this, mentioned below are some important considerations you need to consider to do everything by the book:
Making Business Deductions for Equipment You Purchased for the Express Reason of Doing Business
There are a slew of major and minor tools and equipment expenses that you are going to have to make in order to lift off your business. Things like doing adequate market research, getting the necessary equipment, spending money on your travels to seek and make deals with credible distributors, etc.
You will be pleased to know that the IRS considers all these expenses to start a business. And it allows business owners the liberty to deduct up to $5,000 of all your business expenditure during the year you start it. Furthermore, if you spend more than $5,000 to get your business off the ground, you will be able to amortize the additional amount over the next 180 months.
But keep in mind that there are certain tools and equipment expenses that you cannot include as costs of business. For example, long-term inventory, assets, inventory creation, costs of research and development, managerial expenses, etc. Sure, you can depreciate the value of long-term assets that is if they are more than $2,500. In addition, the legal costs involved in your business are also separately treated. However, the IRS does grant permission to deduct up to $5,000 equal to those expenses.
To simplify, imagine David starts his online shopping business selling paintings. He paints his own designs with the help of other artists. Moreover, he has outsourced the design and development of his website, spending $3,000. He spends $1,000 travelling to different art exhibitions and seminars to sell his paintings, has an inventory worth $3,000, invested $2,000 on equipment, and invested $1,000 on marketing his paintings.
If you add everything up, the total sum he has invested comes to $7,000. David can legally deducted $5,000 as business expenses, and can amortize the remaining $2,000 over a 180-month period.
Deducting Business Expenses for Equipment that You Did Not Specifically Purchase for your Business
To put it simply, you cannot show tools and equipment expenses for equipment you did not intend to buy to start your business. However, you can still claim depreciation on your equipment from the day your business starts.
To simplify, let’s assume David invested in an expensive HD camera for photography as a hobby. However, now he uses the camera for his paintings and other aspects of his art business. He is going to have to identify the true value of the camera the day David started his business and then calculate the total depreciation, spreading the cost over the total life of the product.
It is important to remember that you can write of up to five thousand dollars in expenses as costs incurred for starting up a business. This means no tax – you can do this for expenses such as acquiring suppliers, training your employees, travelling to market your product, etc.
Moreover, you can also have your expenses amortized over a 180-month period, you can do this by calculating the expenses incurred on the very first month when your business began.
If you bought some equipment that you did not originally intend to use for your business, but now you do use the equipment for business purposes, you can depreciate the value of that equipment taking into account the fair market value of the item when you started your business.
If you’d like to learn more about tax laws and your business, we at Akif CPA are here to help. Learn about our services here.
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