More now than ever, when buying a small business, your expense is a necessary investment. You may be asking can I deduct the cost of buying a small business. People have stopped relying on their 9-to-5 jobs for providing for all their needs, let alone the costs of college and retirement. While you can deduct the majority of your business expenses and a portion of your buy-in costs, it isn’t as simple as deducting the full purchase price.
Buying a Business - Ordinary and Necessary Costs
The rule behind every business deduction is that the expenses be an ordinary and necessary expense. The man who tried to write-off a year's worth of steak dinners to write a review book discovered this the hard way. (I'm guessing his arteries had something to say about it too.)
Buying into an existing business is fairly common, and it's normal for new business owners to deduct some of the expenses involved. However, because your new business is an asset, you claim certain expenses as depreciation instead of start-up deductions.
For instance, research, travel and training you invest in before you purchased your business are all capital expenses. These count as business expenses. Purchasing a location, making structural changes to a building, buying new office equipment and the like are all expenses you would have to depreciate.
In addition, some pre-purchase expenses are more personal than business in nature. Noticing a rental property while on vacation does not turn your trip into a business expense. Traveling to an area to inspect a rental property you saw online would be a business expense.
Limits to Deductions on the Cost of Buying a New Business
Many small businesses cost well under the threshold required by the IRS for applicable deductions. As long as you spend under $50,000 acquiring your new company, you can deduct up to the full $5,000 allowed. Once you go over that amount, your reduction threshold gets lower fast. Spend $55,000, and your ability to deduct these expenses phases out.
Deducting Purchase Expenses for a Failed Business
As popular as running a small business has become, failure rates within the first year are high. Many people don’t have the mindset needed to keep a company afloat. What happens to your expenses if you never make money? It depends on your intent.
If you didn’t run your business in a way to make money, it counts as a hobby. That is a personal expense you cannot deduct.
If you invest time and money into your business, it counts as a capital loss. How much of a loss depends entirely on the costs involved. It’s a good idea to work with an expert to make sure you meet all up-to-date requirements for deductions of this nature.
Learn more about buying a small business and answer the question can I deduct the cost of buying a small business by connecting with our legal team at Regina Gordon Law Firm. Give us a call at 347-770-7507.