Page 63 - Small Business Taxes

16:31 - 2-Feb-2023
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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
receipts of $27 million or less for the 3 prior tax If your attempt to go into business is un- – Amounts paid for property with an
years, and (b) are not a tax shelter (as defined successful. If you are an individual and your economic useful life of 12 months or
in section 448(d)(3)). If your business has not attempt to go into business is not successful, less;
been in existence for all of the 3-tax-year period the expenses you had in trying to establish • You treat the amount paid during the tax
used in figuring average gross receipts, base yourself in business fall into two categories. year for which you make the election as an
your average on the period it has existed, and if 1. The costs you had before making a deci- expense on your applicable financial state-
your business has a predecessor entity, include sion to acquire or begin a specific busi- ments in accordance with your written ac-
the gross receipts of the predecessor entity ness. These costs are personal and non- counting procedures;
from the 3-tax-year period when figuring aver- deductible. They include any costs • The amount paid for the property does not
age gross receipts. If your business (or prede- incurred during a general search for, or exceed $5,000 per invoice (or per item
cessor entity) had short tax years for any of the preliminary investigation of, a business or substantiated by invoice); and
3-tax-year period, annualize your business’ investment possibility. • The uniform capitalization rules do not ap-
gross receipts for the short tax years that are ply to the amount.
part of the 3-tax-year period. See Pub. 538 for 2. The costs you had in your attempt to ac-
more information. quire or begin a specific business. These You do not have an applicable financial
costs are capital expenses and you can statement. If you elect the de minimis safe
For more information, see the following deduct them as a capital loss. harbor for the tax year, you can deduct amounts
sources. paid to acquire or produce certain tangible busi-
• Cost of goods sold—chapter 6 of Pub. If you are a corporation and your attempt to ness property if:
334. go into a new trade or business is not success- • You have a trade or business, partnership,
• Inventories—Pub. 538. ful, you may be able to deduct all investigatory or S corporation that does not have an ap-
• Uniform capitalization rules—Pub. 538 and costs as a loss. plicable financial statement;
section 263A and the related regulations. The costs of any assets acquired during • You have, at the beginning of the tax year,
your unsuccessful attempt to go into business accounting procedures treating as an ex-
Capital Expenses are a part of your basis in the assets. You can- pense for nontax purposes:
not take a deduction for these costs. You will re- – Amounts paid for property costing
You must capitalize, rather than deduct, some cover the costs of these assets when you dis- less than a certain dollar amount, or
costs. These costs are a part of your investment pose of them. – Amounts paid for property with an
in your business and are called “capital expen- economic useful life of 12 months or
ses.” Capital expenses are considered assets Business Assets less;
in your business. In general, you capitalize • You treat the amounts paid for the property
three types of costs. There are many different kinds of business as- as an expense on your books and records
• Business startup costs (see Tip below). sets, for example, land, buildings, machinery, in accordance with your accounting proce-
• Business assets. furniture, trucks, patents, and franchise rights. dures;
• Improvements. You must fully capitalize the cost of these as- • The amount paid for the property does not
You can elect to deduct or amortize sets, including freight and installation charges. exceed $2,500 per invoice (or per item
substantiated by invoice); and
TIP certain business startup costs. See • The uniform capitalization rules do not ap-
chapters 7 and 8. Certain property you produce for use in your
trade or business must be capitalized under the ply to the amounts.
Cost recovery. Although you generally cannot uniform capitalization rules. See Regulations How to make the de minimis safe harbor
section 1.263A-2 for information on these rules.
take a current deduction for a capital expense, election. To elect the de minimis safe harbor
you may be able to recover the amount you for the tax year, attach a statement to the tax-
spend through depreciation, amortization, or De Minimis Safe Harbor for payer’s timely filed original tax return (including
depletion. These recovery methods allow you to Tangible Property extensions) for the tax year when qualifying
deduct part of your cost each year. In this way, amounts were paid. The statement must be ti-
you are able to recover your capital expense. Although you must generally capitalize costs to tled “Section 1.263(a)-1(f) de minimis safe har-
See Amortization (chapter 8) and Depletion acquire or produce real or tangible personal bor election” and must include your name, ad-
(chapter 9) in this publication. A taxpayer can property used in your trade or business, such dress, taxpayer identification number (TIN), and
elect to deduct a portion of the costs of certain as buildings, equipment, or furniture, you can a statement that you are making the de minimis
depreciable property as a section 179 deduc- elect to use a de minimis safe harbor to deduct safe harbor election under section 1.263(a)-1(f).
tion. A greater portion of these costs can be de- the costs of some tangible property. Under the In the case of a consolidated group filing a con-
ducted if the property is qualified disaster assis- de minimis safe harbor for tangible property, solidated income tax return, the election is
tance property. See Pub. 946 for details. you can deduct de minimis amounts paid to ac- made for each member of the consolidated
quire or produce certain tangible business prop- group.
Going Into Business erty if these amounts are deducted by you for fi- In the case of a consolidated group filing a
nancial accounting purposes or in keeping your consolidated income tax return, the election is
The costs of getting started in business, before books and records. See the following for the re- made for each member of the consolidated
you actually begin business operations, are quirements for the de minimis safe harbor. group. In the case of an S corporation or a part-
capital expenses. These costs may include ex- nership, the election is made by the S corpora-
penses for advertising, travel, or wages for You have an applicable financial statement. tion or the partnership and not by the share-
training employees. If you elect the de minimis safe harbor for the holders or partners. The election applies only
tax year, you can deduct amounts paid to ac- for the tax year for which it is made.
If you go into business. When you go into quire or produce certain tangible business prop-
business, treat all costs you had to get your erty if: Example. In 2022, you do not have an ap-
business started as capital expenses. • You have a trade or business or are a cor- plicable financial statement and you purchase
Usually, you recover costs for a particular poration, partnership, or S corporation that five laptop computers for use in your trade or
asset through depreciation. Generally, you can- has an applicable financial statement; business. You paid $2,000 each for a total cost
not recover other costs until you sell the busi- • You have, at the beginning of the tax year, of $10,000 and these amounts are substanti-
ness or otherwise go out of business. However, written accounting procedures treating as ated in an invoice. You had an accounting pro-
you can choose to amortize certain costs for an expense for nontax purposes: cedure in place at the beginning of 2022 to ex-
setting up your business. See Starting a Busi- – Amounts paid for property costing pense the cost of tangible property if the
ness in chapter 8 for more information on busi- less than a certain dollar amount, or property costs $2,000 or less. You treat each
ness startup costs. computer as an expense on your books and
Page 4 Chapter 1 Deducting Business Expenses