Start Up Expenses: S1E1

What are 'Startup Expenses' and should they be entered into a bookkeeping system as expenses or another category?   Learn what 'Startup Expenses' are and how important they are to a professional set of books as you starting your business before your first sale.

Transcript

My name is Paul Rosenblum, and I’ve been a bookkeeper for almost 25 years. I started out as a freelance, self-employed bookkeeper. Later, I began teaching QuickBooks and consulting with small businesses to help them set up accounting systems. For a while, teaching and consulting were the main things I did, but in 2004 I began building my bookkeeping practice while continuing to teach QuickBooks regularly.

Today, my practice handles monthly bookkeeping for about 150 small business clients. I still teach both QuickBooks Desktop and QuickBooks Online through webinars and in-person classes on a regular basis. And now, here we are, my very first podcast, Episode #1, where I get to share this information with all of you.

Although I’m not an accountant or CPA and can’t sign off on tax returns, I work closely with accountants when my clients’ taxes are prepared. Over the years, tax professionals have shared a great deal of knowledge with me about IRS tax rules and state tax codes. So in this podcast, I’ll share general bookkeeping skills, discuss small business taxes, and offer tips that may help lower either your business tax liability or your personal tax liability.

First, let’s start at the very beginning. Before you even have a business, you may already be thinking about starting one. Maybe you wake up one day with an idea you want to explore. You might call a friend who already works in that field and offer to take them out to lunch or dinner to learn what it takes to get started.

Well, once you pay for that lunch or dinner, you may have just created your very first startup expense, even though the company doesn’t exist yet.

When you get home, keep the receipt and start tracking those costs in a spreadsheet. Eventually, when you form the company, get a tax ID number, and create a set of books, you’ll want to record those startup expenses properly.

Interestingly, startup expenses usually aren’t treated as regular expenses right away. They’re often considered assets of the company until the business makes its first sale. Once that first sale happens, depending on the amount spent and the tax rules in place, those costs may be deducted immediately or amortized over time.

So yes, bookkeeping can begin weeks or even months before your business officially exists.

What if you never start the company and abandon the idea? In some cases, up to $5,000 of startup expenses may still be deductible on your personal tax return. That means it’s still important to keep receipts and maintain records, even if the business never launches.

Startup expense categories don’t need to be overly specific. They can be broad categories such as meals, travel, research and development, rent, payroll, office supplies, or continuing education.

With each episode, I’ll try to connect the information to a real client situation. Here’s the first example.

In 2019, I began working with a new client who had been doing their own bookkeeping and knew the books needed help. Whenever I meet with a new client, I always ask to see two things:

1. The books, even if they’re messy.
2. The latest tax return.

I reviewed the books and noticed there were no startup expenses listed. I also didn’t see any assets except bank accounts. This was a food truck company, so naturally I wondered, where is the truck listed as an asset? But we’ll save fixed assets for another episode.

There were no startup expenses in the books, and none on the tax return either. Her accountant knew she was a new business but had never asked about startup expenses. I’m glad I did.

She had receipts totaling about $70,000 in startup expenses, including some assets. The food truck itself was an asset and should have been on the books. But the interior buildout of the truck and the cooking equipment inside were considered startup expenses.

We were able to use startup expense deductions and depreciation rules to create significant legal tax savings for the business.

That’s the goal for me: a happy client who saves money by using the IRS tax code properly and legally. To me, that’s golden.

One more thing about startup expenses. If you spend money starting the business and make your first sale in that same calendar year, startup expenses may not need to be separated as assets. They may be included directly on the profit and loss statement as regular expenses.

However, from a bookkeeping standpoint, I still like to track them separately. That way, the owner can clearly see how much money was invested before the first sale.

If startup expenses happen in one calendar year and the first sale happens in the next year, then yes, startup expenses generally need to be separated from regular operating expenses.

If you have any startup expense stories you’d like to share, please email me at bookkeepermensch@gmail.com. Your story may be included in a future episode.

See you next time.