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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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2 months ago I wanted to start a business but I didnt know

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2 months ago I wanted to start a business but I didn't know exactly what. I created an LLC anyway so that I could start deducting various expenses while doing research and travels of various business opportunities. So far, I have approx $1k of expenses that I am planning on deducting through this LLC. Just recently, 2 friends and I agreed to go into business together and form an LLC. Question: Would it be wise to amend MY current LLC to the new name and add the new LLC members? Or should I start from scratch and create a new LLC? Or should I keep both? What about my $1k in deductions? What would you do?
Submitted: 8 years ago.
Category: Tax
Expert:  Lev replied 8 years ago.

It doesn't matter if you create a new business entity of amend an existing one - probably create a new would be easier.

You should also consider that single member LLC is treated as solo proprietorship and all income and expenses are reported on the member's individual tax return.

The LLC with several members is generally treated as a partnership and should file partnership tax return - http://www.irs.gov/pub/irs-pdf/f1065.pdf

 

All expenses you had BEFORE business started is start-up cost - in general should be amortized over 15 years.

You can write off up to $5,000 in startup costs and another $5,000 in organizational expenses in the year that you start your business - thus in the first year you will deduct 1/15 part of the total expenses - and so on in following years.

If you haven't started the business yet - you may not deduct any start-up cost.

please see more details in the IRS publication 334 - http://www.irs.gov/pub/irs-pdf/p334.pdf

 

Lev and other Tax Specialists are ready to help you
Customer: replied 8 years ago.
Does "start of business" mean the date the LLC has been actually filed? Right now, the partners and I are spending money on various startup expenses (ie: filing fees, travel etc..) but the LLC hasn't been filed yet. Can we still write these off (given 1/15 of them)? Also I have one more question: When the 3 of us file for income tax next year, do we get taxed on the amount of distribution we took as salary from the company? What if we reinvested profits back into the business and took no salary? What are the dynamics paying taxes in those situations? thank you again.
Expert:  Lev replied 8 years ago.

"start of business" for deducting start-up cost means not the date of registration, but when the business started to operate.

Generally if the business has received any income - the IRS may consider it has been started.

For instance - if you start remodeling a restaurant - the business is not considered started untill it actually starts serving customers.

However if in some situations the business is considered as started even if there is no income yet. For instance - the business may be considered as started if you already has a product and started to advertize it.

 

Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Organizational costs include the costs of creating a corporation.

 

I suggest you following references for starting the business

Having the company incorporated, obtaining the license, etc doesn't indicate that you are started the business. Please separate these expenses that occurred before the business started (start-up cost) and after the business started (operational cost)

Your operational cost will be deducted from gross income and the business losses will offset other taxable income you might have.

The business income and expenses will be reported on the schedule C - http://www.irs.gov/pub/irs-pdf/f1040sc.pdf

There will not be any self-employment taxes because you are reporting losses.

The net loss will be reported on the form 1040 line 12 - http://www.irs.gov/pub/irs-pdf/f1040.pdf

Start-up cost - expenses you had before the bossiness started - in general should be amortized over 15 years. You can write off up to $5,000 in startup costs and another $5,000 in organizational expenses in the year that you start your business. However as you had losses you may not deduct start-up cost.

Start-up cost is considered your investment and treated differently. If you can't deduct start-up cost in the first year - you should amortize these expenses over 15 years - thus in the first year you will deduct 1/15 part of the total expenses - and so on in following years.

If you sell the business before deducting all of the start-up costs, the taxpayer may deduct the remaining start-up costs as a loss as allowed by Sections 165 and 195(b)(2).