New business startup expenses before operations begin

Technical topics regarding tax preparation.
#1
daveyjw  
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This questions pertains to the timing of taking startup expenses when the expense occurred in a different year than when business operations began.

Fact patters:
1. Client who incorporated a new business at the end of 2022.
2. They had various organizational/start up costs associated with this.
3. Business operations will not/could not begin until 2023
4. Client is using the Cash method of accounting

From my understanding, to deduct organization/start-up cost business operations must have begun.

My read here would be that, even though the expense occurred in 2022 they can't take it yet as business operations did not commence during that year. Instead, we will have to wait until 2023's return to take the start up expenses (even though they occurred in 2022) because that is the year operations started.

Does anyone have a different read on this situation?
 

#2
sjrcpa  
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You are correct.
 

#3
Nilodop  
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They had various organizational/start up costs associated with this.. Two different sections, 248 and 195. Different definitions and rules.
 

#4
IDCPA  
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But both sections require business to have started - as in offering their goods or services - before any deduction can be taken.

My question is how to handle a bunch of beauty supplies a client purchased in 2022 for salon that won't open until 2023?

I'd prefer they not be start up expenditures amortized over 15 years (less $5000 initial deduction). I suppose the best way to avoid this is to treat them as a 1245 asset, which would allow us 179/Bonus/5 year life beginning in 2023 when they are placed in service? They probably really are 1245 anyway - these are supplies to be used in the business, not sold as inventory.
 

#5
DAJCPA  
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Not 100% sure on this, but I believe you can treat them as non-incidental materials and supplies which are treated as inventory until used/consumed. Thus they will be "inventory" until used when business begins. Just don't elect DMSH for the first year as that would require expensing which would thrown them into the start up cost category.
 

#6
IDCPA  
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Makes sense. I'll take a closer look next year :) For this year I just need to explain to a client who thought he had a huge write off that he's going to have to wait a year....
 


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