Business Startup Costs
Managing New Business Start-Up Costs
Deciding to start a new business is very exciting, but with any new business venture, feelings of doubt and anxiety often come along with it. The ambiguity of if and when a new business will become profitable can be scary for many potential business owners. Then, there are the actual costs of starting a business to consider.
From purchasing inventory and equipment to hiring staff and creating a website, it’s inevitable that there will be a lot of spending before a business even opens its doors. Therefore, careful planning, budgeting, and accounting of your business start-up costs are absolutely necessary. Otherwise, you may be setting your business up for failure.
Understanding Start-Up Costs for Tax Purposes
Start-up costs are technically defined as those costs incurred before a new business starts to make any income. This is different from regular expenses incurred after your business is up and running and making money. This is an important distinction when it comes to filing your taxes.
According to the IRS, start-up costs are separated into two time periods. This is the “amount paid or incurred for creating an active trade or business, or investigating the creation or acquisition of an active trade or business.”
Business start-up costs are broken down into the following categories:
- Expenses. These are the costs involved in the preparation of starting a business and can include market research, advertising, training, and fees paid to a lawyer or accountant.
Many of these costs are tax deductible, up to $5,000 in the first year of doing business. The remaining costs are then amortized – you deduct them in equal installments – over a period of 180 months, starting from the month your business started.
If after doing your research, you decide not to start your business, this deduction benefit goes away, and these expenses become non-deductible personal expenses for tax purposes.
- Capital Expenditures. These are one-time costs incurred to purchase assets such as inventory, property, vehicles, etc. These typically don’t qualify for a start-up deduction but can be written off through depreciation.
Actual Start-Up Costs
All businesses have different start-up costs, as an e-commerce business will have different needs than a brick-and-mortar, and a restaurant will have different requirements than a yoga studio. The U.S. Small Business Association (SBA) offers a worksheet for calculating start-up expenses specific to your business.
While each business has diverse financing needs, there are many start-up expenses which are common to all business types. A sample of such costs are:
- Borrowing Costs. When projecting costs, it’s best to over-estimate and determine how much total capital you’ll need to get started. If you don’t have this money on-hand, it may be acquired through a business loan or line of credit. If taking a loan from family and friends, a bank, or the government, or a combination of these sources, monthly payments and interest will need to be factored into your start-up budget.
- Equipment and Supplies. Every business requires equipment and supplies to operate, many of which can be leased, bought or leased with an option to purchase at a later date. Specific lease terms and your financial state before your business starts making money would be deciding factors on whether to rent or buy equipment.
- Insurance, Filing and Permit Fees. Startup costs will differ for a sole proprietorship, partnership or corporation, taking into consideration the legal cost of drafting a partnership agreement and the state registration fees for each business type. Additionally, depending on the nature of your business, you may need certain licenses or permits to operate legally. There’s also insurance costs to consider for protection against liabilities.
- Research Expenses. Extensive research on your industry and consumers is an essential part of business planning. Whether hiring a research firm to handle this process for you or purchasing market research, this is a start-up expense that needs to be figured in your start-up budget.
- Employee Wages. If planning to hire staff, you must prepare for wages, salaries and benefits, also known as the cost of labor. Compensating employees adequately is beneficial to your company morale and helps contribute to your business’ success.
- Advertising and Promotion. A new business must promote itself through advertising and marketing to make potential consumers aware of its existence, and the valuable services or products it offers. Whether hiring an external agency to execute your marketing or handling it in-house, this is a necessary expense for all start-up businesses.
- Website. Every business must have an online presence, so customers can find it through Google searches, learn about your company’s offerings, and obtain your business contact information and hours of operation when needed. Creating and hosting a professional website can be done easily and inexpensively through services like Wix and Weebly, which can eliminate the cost of hiring a professional web designer.
It’s always a good idea to keep extra money set aside for any overlooked expenses or unexpected costs. Unfortunately, lots of companies fail because they don’t have additional funds on-hand to deal with unforeseen issues which can arise.
Keeping accurate and organized accounting records is vital for all businesses, from the start-up phase and through the company’s lifespan. Everlance is the #1 app for recording all business expenses and mileage and providing detailed data and reports. If your company has more than two employees, Everlance Teams integrates expense reporting for your entire staff.
Launching a new business can be a thrilling and rewarding experience. However, getting caught up in the excitement and neglecting details can lead to failure. Before starting any business, it’s always best to do your research, consult with others in your industry, and plan ahead.