Business Startup and Registration
For most businesses, the date the business starts officially is the date on the business registration. Partnerships, LLCs, and corporations must register their business with a state. The effective date is usually the date of filing with the state, but a company can select another effective date. For federal tax purposes, most businesses must register with the IRS and get an Employer ID Number (EIN). Line 11 on this form asks for the date the business started or when ownership transferred. It’s up to the business owner to decide on a start date. The IRS answer for when a corporation begins is that it’s the date of incorporation; that is, the date when the state recognized and filed the business registration. But the IRS also says that “activities of the corporation,” for example, buying necessary operating assets, might be a sign that the business has started. The IRS looks at the circumstances of each case to determine startup date.
Business Startup and Fiscal Year
The year in which the business starts is the first tax year of the business. The IRS calls this a fiscal year. The business fiscal year can be important in the future for purposes of moving business losses into previous years. In this case, the actual date isn’t as important as the year. If you have business activity last year (major expenses or a client), you should have filed a tax return for that year, just to establish the start date to take a business tax loss for that year.
Business Start Date and Startup Costs
The date a business starts can be important when considering whether startup costs are deductible. The IRS says you can deduct startup costs for amounts paid or incurred for:
(a) creating an active trade or business, or (b) investigating the creation or acquisition of an active trade or business.
These costs must be paid before the date when your business begins, so it’s important to establish that date.
The Concept of Going Concern
The concept of going concern comes into play to determine when a business starts. A going concern is a business that operates expecting to be in business for an indefinite period of time. A going concern has an active customer base, is working on advertising, marketing, and other means to gain more customers, and is taking in money from sales. A going concern does not need to be making a profit, but only to show the intent to operate so as to make a profit. You could say a business starts when it becomes a going concern; that is when it begins operating independently with the purpose of making a profit, with business records being kept, and customers being solicited.
Bottom Line
Certainly, the year in which you start your business is important. The selection of income and expenses between one year and the next can be important for taxes, but otherwise, you can select your own start date.
