As a business owner, you generally cannot write off purchases made before your Limited Liability Company (LLC) was formed as business expenses for the LLC. However, you may be able to capitalize or depreciate certain pre-formation expenses or assets if they are related to starting or acquiring the business.
Here are some considerations regarding pre-formation expenses and assets…
- Start-up Costs –
- The IRS allows businesses to deduct up to $5,000 of qualified start-up costs in the year the business begins operations. Qualified start-up costs may include expenses incurred before the LLC is formed, such as market research, advertising, travel, and professional fees.
- Any start-up costs exceeding $5,000 must be amortized (deducted over time) over a 15-year period, beginning in the month the business starts operations.
- Organizational Costs –
- Organizational costs refer to expenses incurred in forming the LLC, such as legal fees, filing fees, and incorporation expenses. Similar to start-up costs, the IRS allows businesses to deduct up to $5,000 of organizational costs in the year the business begins operations.
- Any organizational costs exceeding $5,000 must be amortized over a 15-year period, beginning in the month the business starts operations.
- Capital Expenditures –
- If you purchased assets before forming the LLC that are used in the business, such as equipment, furniture, or inventory, you may be able to capitalize and depreciate these assets over their useful life for tax purposes.
- The IRS has specific rules regarding the capitalization and depreciation of assets, including allowable depreciation methods, recovery periods, and applicable conventions.
It’s essential to maintain detailed records and documentation of pre-formation expenses and assets to support your tax deductions or capitalization decisions. Consulting with a tax advisor or accountant can provide guidance on how to treat pre-formation expenses and assets in accordance with tax laws and regulations.
While you cannot typically write off purchases made before your LLC was formed as business expenses, you may be able to deduct certain start-up costs, organizational costs, or capitalize and depreciate assets related to starting or acquiring the business.
