Question

For a new business, can I fully deduct a capital expense from December 2023 in 2024?

Forum|Forum|2 years ago
December 14, 2023
2 replies
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If I open a new LLC in December of 2023, and purchase capital for that LLC in December, but don't make any revenue until 2024, can I fully deduct the Dec 2023 capital expense from my taxable income in 2024, without depreciating it over several years?

Not A Product Question

O

Opus 17

Employee

Let's start with the date the business begins as an active, ongoing enterprise. You are actively looking for clients, performing work, etc. even if you haven't been paid yet.

Anything before that is "startup costs."

If your business is active and ongoing before the end of 2023, then you file a schedule C to report your expenses. If you have no income, you will show a loss, that can be carried forward to offset profits in future years. Your costs before you started the business are startup costs. If they are $5000 or less, you can deduct them in the first year. If more than $5000, you deduct them partly in the first year and partly spread out over 15 years.

However, if you are not actively pursuing the business in 2023, then you hold onto your startup costs, and report them on schedule C in the first year the business is active (presumably 2024). You would not have a schedule C in 2023.

(I wrote this assuming it was a single member LLC disregarded entity. If this is a multi-member LLC or you made the election to be taxed as an S-corp, I don't know if the rules are different.)

Note that capital equipment is handled separately from other startup costs. Equipment is placed in service for depreciation as of the date the business is open/actively ongoing in the usual manner for equipment, including the options for the $2500 safe harbor, bonus depreciation and section 179 depreciation, if you are otherwise eligible. Other startup costs like legal fees, advertising, paperwork, building your web site, and so on, would be deducted or spread out over 15 years as mentioned.

D

davisyates11Author

Thank you for such a detailed and quick response!

If I may seek further clarity, let's say the December capital expense is $20,000, but it doesn't arrive until mid January, and the business does not have any "activity" or "work performed" whatsoever until 2024. Would this still make the business qualify as "active" in 2023? And if so, would that mean it would have a Net Operating Loss in 2023, and that the capital needs to be depreciated over 15 years starting in 2024?

Also, if the business only lasted 3-5 years, would there be any way to ever fully deduct the cost of that asset, since it wouldn't reach 15 years of maturity?

Critter-3

If you did not have any income, no expenses and the capital asset was not placed into service in 2023 then you have nothing to report on a 2023 tax return.

As for the asset ... if you have a machine that has a 7 year life and you take it out of service before it is fully depreciated you may need to recapture some of the depreciation taken if you use an accelerated method of depreciation.

Critter-3

What do you mean a "capital expense" ? Did you purchase depreciable assets ? If so you have options ... bonus depreciation or regular depreciation but without income the 179 deduction would be limited to the income on the business with the rest carried forward. Before take a loss or a possible NOL on the return reflect all your options carefully. You may want to talk to a local tax pro to get educated on these matters and others.