What Records and Paperwork do I Need to Keep on File?

What Records and Paperwork do I Need to Keep on File?

When starting your own small or solo law firm, it’s important to know what kind of records and documents you need to collect and save for tax purposes. Keeping essential paperwork from the start of your business isn’t only critical for filing taxes, it’s also the best way to understand the financial health of your law firm. Here’s a list of important supporting documents that the IRS recommends all small businesses keep:

Gross Receipts

Your gross receipts are the records that show your income and its source. Examples of gross receipts are:

  • Deposit information (cash and credit sales)
  • Receipt books
  • Invoices
  • Forms 1099-MISC

Expenses

Any documents that show the costs you incur to keep your law firm running should also be saved. Examples of expense documents include:

  • Canceled checks or other documents reflecting proof of payment/electronic funds transferred
  • Cash register tape receipts
  • Account statements
  • Credit card receipts and statements
  • Invoices

Travel, Transportation, Entertainment, and Gift Expenses

In order to deduct travel or entertainment expenses, be sure to keep those records, documents, or receipts to be able to prove that these costs were directly associated with your business.

Assets

If you’ve purchased things like property, electronics, or office furniture for your law firm, saving those documents can help you verify that those are indeed business assets. Those documents should include the following information:

  • When and how you acquired the assets
  • Purchase price
  • Cost of any improvements
  • Section 179 deduction taken
  • Deductions taken for depreciation
  • Deductions taken for casualty losses, such as losses resulting from fires or storms
  • How you used the asset
  • When and how you disposed of the asset
  • Selling price
  • Expenses of sale

These documents typically show this information:

  • Purchase and sales invoices
  • Real estate closing statements
  • Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred

Employment Taxes

The IRS recommends keeping all records of employment for at least four years.

Top 3 Reasons Why Law Firms Need Accountants

Top 3 Reasons Why Law Firms Need Accountants

Here are the 3 key reasons why it’s essential for law firms to work with professional legal accountants:

1. Stay Compliant

Every small or solo law firm needs to follow the tax rules and requirements set in their state. Making a mistake, such as misplacing money from a trust account, can lead to devastating penalties. If you want your law firm to have a strong reputation for being ethical and trustworthy, you need to stay compliant by hiring a professional accountant.

2. Revenue and Expense Tracking

Although small and solo law firms may appear to be easier to financially manage than larger law firms, they can still lose track of hours charged, employee benefits, or operating expenses. When working with experienced bookkeepers and legal accountants, you know exactly where your money is, how it’s being spent, and how much is coming in.

3. Plan for Growth

If you’re hoping to see your law firm grow over the next five to ten years, you need to have strong financial planning. Working closely with a skilled accountant can help you plan for growth with fewer risks and more rewards. A legal accountant can help you understand where you stand now and how to create a path for where you want to go.

What are the Trust Accounting Rules in Your State?

If you mention ‘trust accounting’ so some lawyers, you’ll likely see an immediate and adverse reaction. This is because trust accounting rules and guidelines can be complex and need to be followed precisely. If trust accounting rules are broken, the consequences can be dire, such as losing your license to practice law. Solo and small law firms need to address trust accounting rules from the moment they open their doors. It’s important to check with the trust accounting rules and regulations in your state. While each state’s trust accounting laws will vary, there are a few general guidelines that can apply to small and solo law firms all over the country.

Trust Accounting Basics

What is a trust account for small or solo law firms? In the simplest of terms, a trust account is a bank account that is separate from an account that’s used to store funds for the basic operation and function of your law firm. When a client provides funds given in trust, such as a retainer or a settlement, it needs to be held in an isolated account and never used to pay for operating costs. And when we say never, we mean never, not even by accident. The foundation of a trust account is indeed trust. The money in a trust account doesn’t legally belong to the law firm yet, it’s still the client’s money. This is why it’s so important to keep it stored in a separate account.

In theory, trust accounting sounds pretty simple, right? Store the money given in trust in a special bank account. Unfortunately, the process of using and maintaining a trust account for a law firm can be complicated. It’s one of the reasons why many solo and small law firms choose to work with experienced accountants as guides for trust accounting. An accidental expenditure of funds from a trust account can lead to significant penalties. It’s imperative that you follow trust accounting rules in your state closely.

Quick Guide for Trust Accounting

Here are a few tips and best practices for trust accounting:

Know your state’s trust accounting rules.
We can’t stress this enough. Checking the fine lines and specific details that the bar sets for your state may seem excessive, but it is necessary. They may appear minor, but these details need to be addressed carefully.

Open a trust account with your financial institution.
After you read and review your state’s trust accounting rules for attorneys, use those rules as a guidebook to open your firm’s trust account. In addition, be sure to talk to your financial institution about supplying you with your trust account statements at the end of each period to keep for your records.

Keep a separate ledger for your trust account.
When a client requests to see a transaction that’s associated with the money in the trust account, you want to be able to prove that the funds exist and they’re protected. You can do this by maintaining a separate ledger for the trust account.

Do NOT spend the money.
We understand the temptation. Maybe you’ve just opened your doors and your budget is tight. By bringing in a new client, you’ve got this large sum of money just sitting there while you have bills to pay. Remember that you can NOT use the money in the trust account. Even if you’re able to refund the money immediately, the record of the transaction alone can result in extreme penalties, such as losing your license and your law firm.

Remember that no interest can be collected.
Attorneys can not collect interest on a trust account. The bar requires that interest collected on trust accounts be submitted into a program called IOLTA, Interest on Lawyer Trust Accounts, which is then turned over to charities that provide legal services for those who can’t afford it.

These basic tips can provide a foundation for understanding trust accounting. However, when it comes to managing a trust account, don’t hesitate to contact JetroTax for aid and assistance with trust accounting for your small or solo law firm. As mentioned numerous times above, even small accidents in spending can lead to major penalties. Don’t risk your ability to practice law over trust accounting mistakes. Contact JetroTax to learn more about trust accounting for small or solo law firms.

What’s the Difference Between Cash Accounting and Accrual Accounting?

What’s the Difference Between Cash Accounting and Accrual Accounting?

The difference between cash accounting and accrual accounting is all about how you record revenue coming in and paying out expenses. Choosing one over the other will depend on factors like the size of your law firm or your record-keeping preference. Let’s take a look at what these accounting methods mean and their pros and cons.

What is Cash Accounting?

Cash basis accounting is when revenue is recorded when cash comes in, and expenses are recorded when cash goes out. Small and solo law firms like to use this method because of its simplicity and ease. Because you only record when cash is received or paid, it’s well known for being straightforward and easy to track. Plus, taxes are not paid on any money that you haven’t yet received. However, this method isn’t always accurate when predicting the growth of a law firm. For instance, cash basis accounting might overstate the amount of cash a law firm has on hand when it could be losing money.

What is Accrual Accounting?

Accrual basis accounting is when revenue and expenses are recorded before cash exchanges hands. Accrual accounting is defined by the expectation that the revenue or expense will happen. For instance, money is recorded as revenue when an invoice is sent out but hasn’t yet been paid. This method can make it a bit difficult to keep track of cash flow and you will pay taxes on money that you haven’t received. However, using an accrual accounting method can help portray a more accurate prediction of the health of a law firm long-term.

What Do I Need To Know About Retirement Plan Deadlines?

What Do I Need To Know About Retirement Plan Deadlines?

You may have gone through all of our retirement articles and Podcast episodes and found the perfect retirement plan for you. Now you need to know some deadlines around that.

When do you need to implement the plan by?

When do you need to fund the plan by?

We are going to outline exactly that here today!

By the way, if you are still pondering which retirement plan is right or you need help setting one up, we work directly with Life, Inc Retirement Services. Email us for an introduction or visit this page. 

Retirement Plan Deadlines or Dates To Remember

You will want to be sure to give yourself ample amount of time to ensure not running up on a deadline.

  • January 1 – Start Of Plan Year
    • This is the start of the plan year for most retirement plans that are on a calendar year schedule. 
  • April 15 – IRA
    • Deadline for IRA implementation or contributions for previous tax year.
  • October 1 – Safe Harbor 401k + Simple IRA
    • Deadline to implement these plan types for current tax year.
  • October 15 – 401(k) Plan + SEP IRA
    • Deadline to implement and contribute towards all 401(k) plans in the employER portion or a SEP IRA (tax filing date including extensions).
    • NOTE: September 15 for Partnerships and S Corporations
  • November 1 – Switching From Simple IRA to 401(k)
    • Deadline for 60-day notice to employees of switching from a Simple IRA to a 401(k) for the next tax year.
  • December 31 – 401(k) Plan – EmployEE Portion
    • Deadline for implementation and contributions for employees to contribute towards a 401(k) plan for current tax year.

What Else Should I Know?

Some other key things to know about retirement plans in general.

  • You can only have one company retirement plan in place at one time.
  • You cannot make a change within a calendar year, you must wait until January 1.
    • Ex: Lets say you have a SIMPLE IRA but want to move to a Safe Harbor 401k. You would be able to do that but you could need to wait until January 1 to make the official change.
  • Don’t wait, get on top of it early. The last thing you want to be doing is scrambling close to a deadline and missing out.

If you are looking for professional advice and help in this area, we work directly with Life, Inc Retirement Services. Email us for an introduction or visit this page. 

On the link above you can setup a call to connect with an expert and get started right away. There is also a retirement plan evaluator which will guide you towards the best plan for your business.

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.

How Does The Child Tax Credit Work For 2021?

How Does The Child Tax Credit Work For 2021?

COVID has had such a major impact on everyones lives in so many different ways. Here as accountants it also means constantly changing already complex tax laws.

In our Free Facebook Group and all around the internet we have been seeing questions on the changes to the Child Tax Credit for 2021 so we can to take the time to break it down for you.

What Are The Typical Parameters Around The Child Tax Credit?

Before we dig too deep into the changes for 2021 specifically, lets talk historically.

  • For 2018-2020 and 2022-2025, the maximum annual CTC is $2,000 per qualifying child.
  • A qualifying child is under age 17 who could be claimed as your dependent for the year.
  • Phase Out If Modified Adjusted Gross Income Exceeds:
    • $200k (Single)
    • $400k (Married)
    • Note: the credit phased out by $50 per $1,000 of MAGI in excess of threshold

What Are The Changes To The CTC For 2021?

For the 2021 tax year only, the American Rescue Plan Act of 2021 (ARPA) makes big, taxpayer-friendly changes to the federal income tax child tax credit (CTC). 

  • Qualifying Children Can Be Up To 17 Years Old
    • vs under 17
  • Maximum Child Tax Credit of $3,000 per Qualifying Child or $3,600 If Age of 5 Or Younger
  • Phase Outs
    • The increased CTC amount ($1,000 or $1,600) above original is phased out for those with MAGI above $75k (Single) or $150k (Married)
    • The “regular” $2,000 CTC amount is subject to the regular phaseout rule.
    • Note:If you’re not eligible for the increased CTC amount for 2021 because your income is too high, you can still claim the regular CTC of up to $2,000, subject to the regular phaseout rule.
  • IRS Will Make Advance CTC Payments (Hopefully)
    • The COVID relief plan establishes a program to make monthly advance payments of CTCs.
    • Payments will equal 50% of the IRS’s estimate of your allowable CTC for 2021.
    • These payments will be made in equal monthly installments from July thru December 2021.
    • They will be using information from your 2020 Form 1040 (or 2019 if you haven’t filed yet) when doing those estimates.
    • Example: Lets say you qualify for a CTC in 2021 of $6,000 for two qualifying children. The IRS would advance you a total of $3,000 (50% of allowable CTC) via monthly payments of $500 each for July thru December. The remaining CTC of $3,000 will occur when filing your 2021 Form 1040.

Hope that helps clear this new change up a little bit!

For more details on this along with additional training and tax strategies to ensure you are paying the least amount in taxes as legally possible, check out our Tax Minimization Program!

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.

How Can I Deduct 100% of Employee Recreation and Parties?

How Can I Deduct 100% of Employee Recreation and Parties?

Not too long ago we talked about meal expenses for small businesses. We also discussed how entertainment expenses are no longer deductible but what if we told you that if you do it the right way you can party with your employees and deduct 100% of the cost?

We get questions like this all of the time in our Free Facebook Group so here is a great article to touch on it.

How Is It Possible To Get a 100% Deduction For Entertainment?

If you take Billy Bob, your best client, out golfing, the cost of golf will give you no tax deduction. However, if you take your employees to the local country club, enjoy golf, lunch, dinner, etc it can be 100% deductible.

  • Activities That Qualify for the 100% Employee Entertainment Tax Deduction
    • “expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees” qualify for the 100 percent deduction.
    • Examples: Holiday parties, annual picnics, and summer outings, maintaining a swimming pool, baseball diamond, bowling alley, or golf course.
  • MUST be primarily for the benefit of employees other than a tainted group. A tainted group includes:
    • Highly Compensated Employee (More than $130k in 2021) 
    • Anyone who owns at least 10% interest in the business
    • Any member of the family of a 10% owner (children, spouses, siblings, parents, grandparents, etc.)
    • As an owner you are part of the tainted group which is fine, you just need to make sure the partying is primarily for the benefit of the employees.
    • Primarily = More Than 50%
    • Be sure you hav clear and accurate documentation in your records to support this!

What Else Do I Need To Know? 

Documentation, Documentation, Documentation

  • You still need to meet the business requirement of ordinary and necessary. This should be relatively easy, improving employee morale or creating a fun and inviting culture.
  • Documentation – You must keep good documentation regarding your employee entertainment expenses (just as you would any other business expense).
    • Keep Receipts (Who/What/Where/When/Why)
    • Document the business reason for the entertainment (annual retreat to boost employee morale, office party to celebrate new big client, etc.)
    • Keep record of who the outing all benefits so that you can ensure you are under 50% from the “tainted group”.
    • When coding in your bookkeeping, make sure you have a separate line item so it doesn’t get wrapped into any nondeductible items or 50% meals.

That is it! Now go out and take care of your employees and do a little partying this summer!

For more details on this along with additional training and tax strategies to ensure you are paying the least amount in taxes as legally possible, check out our Tax Minimization Program!

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.

How Does The Legal Structure Of Your Business Affect Tax Filing?

How does the legal structure of your business affect tax filing?

Deciding to flex your entrepreneurial muscles and start your own law firm is an exciting step in your legal career. Running your own firm means that you’re doing a lot more than practicing law. You’re also running a business. You’ll have to make big decisions about things like your location, your brand, your area of focus, and of course, how you plan to legally structure your practice for tax filing purposes. In order to help you make the right decision for your small or solo law firm, let’s explore some of your choices.

Sole Proprietorship

A sole proprietorship is a popular choice for many solo law firms. In this business structure, you’re the sole owner and operator of your practice. This also means you’re the one liable for your business’ obligations, such as any debts or losses incurred while you’re in business. You’ll be required to obtain the appropriate licenses and permits, but you won’t have to file any forms with the state. The income from your sole proprietorship will be reported on your personal income tax return.

Advantages of a sole proprietorship include:

  • Low tax rates
  • Inexpensive and easy to get up and running
  • Taxes are simplified
  • You’re in control

Disadvantages of a sole proprietorship include:

  • You’re personally responsible for any legal trouble you might encounter
  • You pay self-employment taxes
  • Raising capital can be difficult

Partnership

If you’re hoping to start a firm with another lawyer or business associate, then a partnership might be the right path for you. A partnership has two or more people who split the business responsibilities. In this structure, partners basically share everything equally, including profits, liability, and management. Partnerships file tax returns on the income of their business, and they also file taxes personally on their portion of the income or any losses. If you’re not too keen on sharing liability, you can see if a limited liability partnership is available in your state.

Advantages of a partnership include:

  • Inexpensive and easy to get up and running
  • Room for growth
  • Incentives for incoming employees to reach partnership level

Disadvantages of a partnership include:

  • Personally liable for the acts of others
  • Lack of control over business decisions
  • Potential for conflicts between partners

Limited Liability Company (LLC)

A limited liability company (LLC) is often seen as a blend of a corporation, a partnership, and a sole proprietorship. That means that you can still structure your business as an LLC if you’re running a solo law firm. Structuring your law firm as an LLC protects you personally from any losses or wrongful acts made by the company. The LLC itself doesn’t pay taxes — the owners of the LLC claim profits and losses on their personal taxes. LLC’s must file organization papers with the state and create an agreement on how the business will operate as well as the rights and responsibilities of the members and managers.

Advantages of a limited liability company include:

  • Members and managers have more protection
  • Any surplus earnings are not taxed
  • Not many restrictions on profit sharing

Disadvantages of a limited liability company include:

  • If a member decides to leave, the LLC is at risk of dissolving in some states
  • May be subject to self-employment tax
  • Some states put restrictions on certain professions operating as an LLC

Corporations

Corporations are single legal entities with limited liability and are typically owned by a group of people. A corporation has to deal with more red tape and formalities than other business structures. For instance, all paperwork must be filed with the state and you must create bylaws that will dictate the way a corporation will operate. You also have to create a board, have board meetings, and issue funds to the corporation’s stock. Corporations can be filed as a C Corp, which are separate legal entities owned by shareholders. They can also be filed as an S Corp, which allows profits and losses to be passed through personal tax returns and requires shareholders to pay taxes on distributed dividends.

Advantages of corporations include:

  • No personal liability
  • Easy to raise funds
  • Tax-deductions

Disadvantages of corporations include:

  • Lack of control, since the corporation is run by a board
  • Double-taxation
  • Complicated to get up and running

Now that you know a little bit more about the different legal structures of businesses, which one is right for you?

For more information about how to structure your new small or solo law firm, contact the tax pros at JETRO today!

For more details on this along with additional training and tax strategies to ensure you are paying the least amount in taxes as legally possible, check out our Tax Minimization Program!

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.

How Do I Avoid A Big Tax Bill Or Surprise?

How Do I Avoid A Big Tax Bill Or Surprise?

I get it, everyone hates talking or thinking about taxes. However, avoiding the word tax only makes the situation worse. We hear stories from business owners all the time where they are simply paying too much in tax or are surprised with a big tax bill at year-end.

In our Free Facebook Group a member actually just posted about this so here we go.

How Do I Avoid A Big Tax Bill?

Plan, Plan, Plan

  • #1 Mistake Business Owners Make: Failing to Tax Plan
    • When thinking about tax, most business owners think about tax filing in March and April.
    • However, that is the LAST step in the process.
    • Tax planning should occur way before the year is even over.
  • What Is Tax Planning?
    • The act of doing research and implementing strategies to ensure you are paying the least amount in taxes as legally possible.
    • Check out Baseline Tax Strategies vs Advanced Tax Strategies for more information on type of tax planning strategies.
    • Most tax planning needs to be implemented BEFORE year-end.
    • We recommend sitting down in June to do tax planning. Why June? You have a half of years worth of data to see how your business is performing this year and you have a half of year left to implement those strategies.
  • Simply Put: If you are not doing any tax planning you are paying more in taxes than you should be.
  • My Goal: When you hear taxes you think of tax planning FIRST and tax preparation and filing AFTER that.
  • If you already got hit with a big tax bill, I understand it, that sucks. However, use that as your motivation to make a change NOW to avoid that in the future.

How Do I Avoid A Tax Surprise?

Estimates, Estimates, Estimate

  • Tax surprises are never fun, avoiding them involves multiple parts.
    • #1 – Accurate and Up To Date Bookkeeping: You need to have accurate and up to date bookkeeping so that you know how your business is performing at any point throughout the year. As part of our Tax Minimization Program we have an entire set of modules specifically on how to do bookkeeping on your own. Do NOT neglect this part of your business.
    • #2 – Tax Planning: We discussed this part above.
    • #3 – Estimated Tax Calculation: Once you have a good idea on all of your income (this includes business and non-business activity) you can do tax estimates. This entails taking the information/expected income and estimating what your tax bill will be so that you can properly plan and pay those estimated taxes as necessary.
  • #2 and #3 above often times play together. You may be estimating a large tax bill and thinking, how can I reduce that and that is when you will dive into additional tax planning strategies.

That is it! It all stems around planning. Make this be the year that you pay the least amount in taxes as legally possible and avoid any tax surprises.

For more details on this along with additional training and tax strategies to ensure you are paying the least amount in taxes as legally possible, check out our Tax Minimization Program!

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.

How Are Start-Up Costs Handled?

How Are Start-Up Costs Handled?

Thinking of starting a business? Congratulations! This is one big step in tax savings. Being a business owner provides you a lot of opportunities for tax deductions that are not available to a typical W2 employee.

We talk about those tax savings options in most of our articles but today we are going to talk specifically about the costs associated with starting up your business and how those are handled.

We got this question a lot in our Free Facebook Group so I figured it was time to tackle it to clear things up for everyone!

What Are Start Up Costs?

Instead of waiting until you officially open for business, you can start the timer now on your deductible expenses. 

  • Per the IRS website, start-up costs are amounts paid or incurred for:
    • Creating an active trade or business
    • Investigating the creation or acquisition of an active trade or business.
  • To qualify as a start-up expense it must meet both of the following tests:
    • It is a cost you could deduct if you paid or incurred it to operate an existing active trade or business (in the same field as the one you entered into).
    • It is a cost you pay or incur before the day your active trade or business begins.
  • Here are some common start-up expenses we see:
    • Travel Costs 
    • Meal Expenses 
    • Training Costs
    • Market Analysis
    • Book or magazine purchases related to the business.
    • Office supplies to use in the business.
    • Advertising fees for the opening of your business.
    • Wages or contractor labor for consultants and employees.
    • etc.
  • Costs That DO NOT Qualify As Start-Up Expenses
    • Interest
    • Taxes
    • Research and Development Costs
    • However these can generally be deducted under other tax law provision.

What Are Organizational Costs?

Wait, organization costs? That’s not considered start-up?

  • The IRS has two separate categories for what you might think of as start-up costs. We discussed actual start-up costs above. 
  • Organizational costs are those expenses for the actual formation of the company. This would be if you are setting up an actual entity and not just a sole prop.
  • Examples of organizational costs are:
    • State incorporation or registration fees
    • Legal and Accounting Fees
    • The cost of temporary directors
    • The cost of organizational meetings
  • To summarize, you may have both start-up costs AND organizational costs.

How Does The Tax Deduction For Start-Up and Organizational Costs Work?

Alright, so now that we understand what are start-up and organizational costs, how does the deduction work?

  • Important Number: $50,000 (For Each Start-Up and Organizational Costs)
  • Total Less Than $50k
    • Deduct $5,000 in the first year the business starts
    • Amortize Remaining
  • Total More Than $50k
    • First year deduction decreases by $1 for every dollar over $50k
    • Amortize Remaining
  • How Amortization Works
    • Deduct Remaining Equally Over 180 Months (15 Years)
    • Complete and attach Form 4562 to your return for the first year in business.

Examples Of Start-Up Costs Deduction

Lets put this into practice and use some actual numbers..

  • Start-Up Costs: $3,500
    • Deduct all in first year of business
  • Start-Up Costs: $45,000
    • Deduct $5,000 in first year of business
    • Amortize remaining $40,000 equally over 180 months ($222 per Month)
  • Start-Up Costs: $52,000
    • Deduction $3,000 in first year of business ($5,000 less $2,000 over $50k)
    • Amortize remaining $49,000 equally over 180 months ($272 per Month)
  • Start-Up Costs: $65,000
    • Amortize all $65,000 equally over 180 months ($361 per Month)
  • Organizational costs would work the exact same way, if you qualify.

Start-Up Costs Frequently Asked Questions

I still have questions..

  • When are you considered “in business” and no longer start-up costs?
    • When a “sale” occurs. Lets use an example of starting a lawn service. You may have made flyers and bought some weed killer and a few garden tools these would all be start-up costs until you have your first sale. Once you first sale occurs expenses are just normal operating costs.
  • How does equipment factor into this?
    • Equipment would not be included in start-up costs but rather depreciated. Lets assume you are starting that lawn care business. Your new lawn mower for the business would be an asset that you depreciate and not included in start-up costs. 
  • When can I start recording these start-up costs?
    • You have to wait until the new business actually begins to start realizing the tax benefits of your start-up expenses but you can start accruing and recording them as soon as you start thinking about creating your business.
  • What happens if my start-up never becomes an active business?
    • You need to start and make the business an active business for the start-up costs to be deductible. If you fail after starting, then you can realize the unamortized deductions. If you never start, the costs you had in your attempt to acquire or begin a specific business are capital expenses and you can deduct them as a capital loss. Costs you had before making a decision to acquire or begin a specific business would be personal and non deductible.
    • Keep in mind the specific piece. Example, if you are just doing general research/analysis and do not have any specific business in mind and you end up not moving forward with anything, those are considered personal expenses and not deductible.
  • What else should I keep in mind?
    • Always keep detailed and accurate records to substantiate your costs in case the IRS challenges you.
    • Once your business starts, expenses after that start date move to normal operating expenses and stops the addition to start-up costs.
    • If you close your business before costs are fully amortized (180 months) you will take the remaining when closing.

This can often times be a confusing area but hopefully we were able to break it down in an easier to understand format for you.

For more details on this along with additional training and tax strategies to ensure you are paying the least amount in taxes as legally possible, check out our Tax Minimization Program!

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.