Summary: One area new companies tend to neglect is accounting. However, proper accounting practices can make a big difference in how fresh companies handle the money coming in and out.

As the millennial generation grows into adulthood, and advancements in technology are at an all-time high, we are seeing a big rise in start-up companies. Younger adults are compelled to start their own businesses and often call on their friends and colleagues to help them in their endeavors. While this is ambitious, it causes many new companies to hire the wrong people for certain positions, particularly in accounting. As the accounting profession becomes less and less attractive to younger generations, due to the stereotypes and perceived monotony of the profession, it is much harder to find young professionals with the skills and knowledge to properly account for the revenues and expenses of start-up companies. One of the most neglected areas is how to treat start-up costs. Though it does not seem too important, properly accounting for these costs can really help a company’s financial standpoint early in its life.

Expensing Vs. Amortizing

When a business is able to expense an expenditure, it recognizes the tax benefits right away, because taxable income is reduced by the entire amount. Amortization is a gradual write off of expenditures, thus delaying the benefits of a cost over multiple years. Though companies would prefer to expense all their costs right away, rules and regulations keep them from doing so. These rules are in place to ensure that businesses recognize expenses when they receive the revenues related to those expenses.

Expensing Start-Up Costs

Luckily, companies in the first year of business can expense $5,000 of the start-up costs right away, as long as they spent less than $50,000. If a company spent $55,000 or more, the $5,000 deduction is eliminated. They amortize amounts that exceed $5,000 over 180 months, or 15 years. Eligible costs include, but are not limited to, the costs to analyze potential markets, travel fees to secure suppliers, and construction & turnaround services, such as temporary managers and directors to get the business up and running.

It is crucial, especially for newer companies, to understand the consequences of financial decisions. Without the proper accounting professionals, businesses could fail to expense or properly amortize expenditures, thus setting themselves up for longer term mistakes. For example, if a company thinks it will have more income in later years, maybe it should not use the $5,000 deduction right away, and choose to amortize all of the costs so it can reap the benefits when it has more taxable income. Should a start-up ever need assistance in its early stages, call Lyle Charles and he will find you the best professionals in any department.

Why Start-Up Companies Can Benefit from Accounting Services