Q. I’ve been thinking about quitting my corporate job of many years and starting my new business. I’ve read a little bit about starting a new business and wanted to know if you have any advice for me and others who may be considering a new beginning where work is concerned. Also, I plan to take some training to prepare me for this new venture while still employed here. Will that be a tax-deductible expense for me?
A. There is a lot of good information in books, on the Internet and from consultants concerning starting your own business; I’d recommend doing some more research before you quit your day job. In addition to the startup costs, recurring costs and loss of W-2 income, you will need to prepare for the costs associated with replacing any needed benefits currently provided by your employer, such as medical, dental and life insurance. If you currently have disability insurance, know that you will not be able to get this type of insurance until you have an earnings track record in your new career.
Knowing your goals for the business, your personal strengths and your weaknesses is a good place to begin. Do you have the support of your family? Develop a realistic estimate of the startup and recurring costs of your business and the time frame to begin seeing a profit from your new venture.
How much savings or outside investment do you have, how long will this support you and your business, and what impact will this have on your overall financial situation? You didn’t provide your age, but if you are near retirement, starting your own business may not be wise if the cost of doing so derails your retirement plan.
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You’ll want to decide what type of business formation would be best. Sole proprietorship, partnership, corporation or limited liability company (LLC) are the most common formations. Incorporating involves some expense but it makes the business a separate legal entity and prevents you from being personally liable if something goes wrong. You also need to research what licenses and permits may be required.
Developing a business plan even if you are not seeking outside financing is a valuable exercise. A typical business plan will include the following: executive summary, company overview, products/services, target market, marketing/sales plan, milestones, management team and a financial plan.
The cost of investigating the creation or acquisition of an active trade or business and the cost of getting a business ready to operate (before you open for business) can qualify as deductible startup costs regardless of the business form.
Some examples: legal fees to set up your business, travel to meet with others in similar businesses for research about the business, logo or web site development, training costs (excluding costs to qualify for the new business), business stationary and supplies, rent/security deposit for the business location, advertising the opening of your new business.
Startup expenses can be written off when expenses equal the lesser of actual costs or $5,000 (if the actual costs exceed $50,000 there is a reduction).
Startup costs not eligible for an immediate write-off are deducted over a 180-month period beginning with the month the business begins. The IRS will assume that you have made the election to amortize your startup expenses for the taxable year you began your business, but some tax professionals recommend that you make a formal election to deduct and amortize your startup costs. Hiring a good tax professional may be part of your new business expense!
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624