Question

Taylor started a new business on June 1, 2022. She incurred $40,000 in start-up costs. She will deduct the maximum allowed on her first tax return and amortize the remainder. What amount will she deduct as a first-year, start-up expense for 2022?

Answer 1

Taylor can deduct $5,000 as a first-year start-up expense for her new business in 2022. The remaining $35,000 of her start-up costs can be amortized over the next 15 years starting in June 2022.

Step-by-step explanation:

The question asks for the amount that Taylor will deduct as a first-year, start-up expense for 2022 for her new business. According to the IRS, businesses can deduct up to $5,000 in start-up costs in the first year of activity. Any remaining start-up costs over $5,000 can be amortized over a period of 180 months (15 years) beginning with the month in which the business begins. In Taylor's case, she incurred $40,000 in start-up costs. Therefore, she can deduct the maximum allowed amount of $5,000 for her first tax return.

If we break down Taylor's costs, she has $35,000 ($40,000 - $5,000) that she can amortize over the next 15 years. This amortization would begin in June 2022, when her business started. It's important to note that if her business had over $50,000 in start-up costs, the $5,000 deduction would be reduced by the amount exceeding $50,000. As her start-up costs were $40,000, she does not face this reduction and can fully utilize the $5,000 deduction.