# How to Handle Expenses Before Your Business Begins: The Start-Up Rule

Let’s say before your family child care business began you bought a computer, a dining room chair, a toy and a smoke detector.

What are the rules to follow in deducting these items?

Items costing less than \$2,500
If you bought an item for less than \$2,500 to help you start your business, it’s considered a start-up expense. Examples include advertising, children’s books, business name registration fees, first aid kit, supplies, training workshop fees, and so on.

You can deduct up to \$5,000 of start-up expenses in the year your business begins. For example, let’s say a provider buys \$1,000 worth of small toys (none costing more than \$2,500 each), \$50 for a child development workshop, \$80 for storage boxes, and \$300 in arts and craft supplies in the summer of 2016. If she starts her business in July 2017 she will be able to deduct the full \$1,430 on her 2017 tax return. This assumes she is using all of these items 100% for her business. Start-up expenses in excess of \$5,000 must be amortized over 180 months (15 years).

If you did not use the item at all until your business began, deduct the purchase price. But what happens if you personally use any of these items before your business began? In this case, you must estimate the fair market value of the items at the time you business did begin before you deduct it.

For example, if you personally used the storage boxes (\$80) in December 2016, you would estimate their value in July 2017 once you began using them in your business. Perhaps they would be worth \$50 by then. If you use the storage boxes for both business and personal use once your business begins, multiply the \$50 by your Time-Space Percentage to determine your business deduction.

If you put the storage boxes in your basement and only began using them for your business in July 2017, you would deduct the full \$80.

Items costing more than \$2,500

If you buy items that cost more than \$2,500 (computer, swing set, washer, dryer, furniture, etc.), you must depreciate them. Depreciation means you claim a portion of the cost as a deduction over a number of years.

Most household items are depreciated over seven years. For details on depreciation rules, see my article “The Categories of Depreciation.”

It doesn’t matter if you bought these items to help you start your business or not. In most cases you will have to depreciate them. (See my article that describes an exception to this rule.)

If you bought the item before your business began, use the value of the item when it is first used in your business.

Family child care providers will have a house full of furniture, appliances and hundreds of household items at the time their business begins. You are entitled to depreciate all of these items once they are used in your business. You must depreciate them, even if their original cost was less than \$2,500.

If you purchase an item after your business begins that costs \$2,500 or more, you must follow the regular depreciation rules.

You will gain a lot of business deductions if you do a household inventory of all items in your home before your business begins. See my article on how to do this.

Summary

Confused? Here’s a summary:

* Cost less than \$2,500 – deduct in one year (start-up expenses limited to \$5,000)
Example: \$40 toy purchased in 2016 and first used in 2017 when business begins. Deduct in 2017.
* Cost more than \$2,500 – depreciate
Example: \$3,000 swing set purchased and used personally in 2014. Used for business and personal use in 2016. Estimated value when first used for business: \$2,000. Depreciate using your Time-Space Percentage on \$2,000 in 2016.

Estimate the value of the item at the time it is first used in your business and depreciate it, regardless of its cost or value at the time. Apply your Time-Space Percentage if it’s used by your family and your business.
Example: \$50 rocking chair and \$400 freezer used both for business and personal use. Multiply by your Time-Space Percentage and depreciate both.

Although this is a relatively complicated issue, claiming start-up expenses and other deductions for items purchased before you started your business is well worth your time.

Tom Copeland – www.tomcopelandblog.com

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For more information, see my book Family Child Care Record Keeping Guide.

### 7 replies

1. What if you don’t have receipts for items you had before you started your business? Toys, pack & play and what not

2. Take pictures of these items. Reconstruct whatever you can about when you bought them, where and how much they cost. Do your best to estimate the cost and you will be fine.

3. What if I spent money to have my logo and website designed in 2013, but did not obtain my LLC certificate until February 4, 2014?
December 12, 2013
Logo Design & Purchase of Rights \$308
December 22, 2013
Website Design & Purchase of Rights \$2238
Plus, there are many other items that were purchased solely for the business such as office supplies, business cards, etc. all in the month of December.
I filed my personal taxes on January 28th and have already received my return. Will this have any effect?
Thank you!

4. How much am I allowed to spend each year on updating my program and curriculum? Is there a \$5,000 cap on that, too?

• Once your business begins you can spend as much as you want to update your program. There is no \$5,000 cap.

5. So I paid my license, cpr fees and background fees in 2016, but wasn’t licensed until 2017. I can deduct my 2016 expenses in 2017?

• If you were caring for children in 2016 you can deduct these expenses in 2016. If you didn’t start caring for children until 2017, deduct these expenses on your 2017 tax return.