Tax question: writing off initial startup seed money


1

So, tax season is upon us and I'm finding myself doing taxes (yay)

My question is simple (I think):

In 2010, I started my company, bootstrapped. I've initially paid a bunch of expenses from personal account, such as: company registration and other startup expenses

As soon as I got my bank account, I've put a chunk of personal money into it as the official "seed" amount. I immediately turned around and expensed and paid myself back every expense I incurred. In this way, I was trying to make sure that every personal payment that went for startup expenses was on the books thru expense reports. The only personal payment into company ended up being the "seed" check.
Now, by the end of 2010, I did not spend all the seed money and since I was still building my product, I didn't generate anything at all.

Now is the question: I understand I can write off up to $10k in startup costs, but I believe that they must be "itemized" and there are no mentions of anything about a "seed" chunk the way I've done it as a qualifying itemization.

1) Do I claim the seed chunk as income from schedule C perspective and write-off corporate expenses as usual? If so, how do I write-off the "seed" chunk itself? Does this mean I have to pay taxes on the amount of seed money that was not spent in 2010?

2) Do I "undo" initial expense reports and original seed investment and simply deduct ALL my original spending as "startup costs" for 2010? How do I "undo" this?

Appreciate the advice. My startup is an LLC partnership.

Tax Seed Funding

asked Mar 16 '11 at 14:17
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Igorek
886 points

2 Answers


4

I would contact a CPA on this, just to make sure you do it right in sync with your tax return. You really shouldn't have a problem...

The answer to #1 is NO---this is not income. This is startup capital and belongs on the balance sheet, not the income statement.

The LLC will show no revenue, but will show expenses (itemize them) via the payback to yourself. You can then carry the LLC net loss to your personal return in a separate schedule. Since you, the person, were paid back, there really is nothing to claim there.

Again, go over this with a CPA as you file your taxes....but you look to be in a good spot to me...your expenses are on the LLC instead of on you the person-- and they should stay there. The seed chunk is neither expense nor income, it is a capital contribution and will be used to determine your cost-basis for the LLC shares in the future should you dissolve or sell.

answered Mar 17 '11 at 00:54
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Andy Swan
1,656 points
  • Andy is right, you really only get taxed on income. So regardless of what account you used to pay for your startup expenses you can write it off. It makes for ugly bookkeeping, but as far as the IRS cares is that you dont write it off twice (on your personal and business return). Even then, with small numbers, and a new business you have a very low risk of even dealing with an Audit. They usually wait until you have some $$$ before they bend you over. – Frank 8 years ago

1

No this "seed money" is contributed owners capital not income so there is no reason you have to pay taxes on it. Regarding startup costs you have to make sure that it qualifies. Equipment, supplies, and such do not qualify (see below an excert from Pub 535):
Qualifying costs. A start-up cost is amortizable if it meets both of the following tests.
It is a cost you could deduct if you paid or incurred it to operate an existing active trade or business (in the same field as the one you entered into).

It is a cost you pay or incur before the day your active trade or business begins.

Start-up costs include amounts paid for the following:
An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.

Advertisements for the opening of the business.

Salaries and wages for employees who are being trained and their instructors.

Travel and other necessary costs for securing prospective distributors, suppliers, or customers.

Salaries and fees for executives and consultants, or for similar professional services.

Hope this helps!

answered Jun 18 '11 at 06:59
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Shannon
11 points

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Tax Seed Funding