How to Deduct Business Start Up Costs From Prior Tax Years
- 1). Use the straight line method of depreciating startup expenses in excess of $5,000. This method involves writing off, or deducting, an equal amount of the cost of these expenses during each year of the five year period. For example, if your startup costs total $10,000 and you have elected to deduct $5,000 during the year you start your business, deduct 20 percent of the remaining $5,000, or $1,000, during each of the five subsequent years.
- 2). Fill out part VI of IRS Form 4562. This is the section covering amortization. In the column headed "Description of Costs", write "Startup expenses". Enter the first day of the calendar year following the year you started your business as the date that the amortization begins. Enter the total amount that you will deduct over the course of five years as the amortization amount. Under the "Code Section," enter the number 179. Under the "Amortization or Percentage" enter "5 years".
- 3). Calculate 20 percent of the total startup expenses your will be deducting over the course of five years. Enter this amount in Column "f" of IRS Form 4562 Section VI.
- 4). File an amended tax return for any prior year for which you decide to deduct startup expenses incurred during that year. Use Form 1040X to change the previoous year's reporting information. Revise your Form 1040 for the year you are amending to include up to $5,000 of startup expenses, and then amortize any additional startup expenses over the next five years using Form 4562. You may not include any expenses that you have already claimed as business deductions on this amended return.
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