Purchasing items before opening a business

Discussion in 'Growing and Managing a Business' started by dpraptor, Dec 29, 2010.

  1. dpraptor

    dpraptor
    uix_expand uix_collapse
    New Member

    Joined:
    Dec 29, 2010
    Messages:
    4
    Likes Received:
    0
    Hi All,

    I recently sold my business and am currently preparing to start another. What I need to know is can I purchase items I need for the business before I actually get my EIN or before I register with the state, and still be able to write them off as a business expense, or do I have to first have all the registrations done, and the business established before I make any purchases to write off. I have already bought a few things I need to get the business started, but wanted to be sure before I buy anthing else.

    Thanks!

    This might be in the wrong area! Sorry, can you move it to an approprate thread?
     
  2. Clasione

    Clasione
    uix_expand uix_collapse
    New Member

    Joined:
    Dec 22, 2010
    Messages:
    9
    Likes Received:
    0
    That's a pretty interesting question. I would have guessed that an entity should at least exist before attributing expenses to it, but then again, startup costs seem pretty reasonable and maybe they do have a place on a businesses first return regardless of the effective date.... Any accountants have some input on this one?
     
  3. Fergal

    Fergal
    uix_expand uix_collapse
    Premium Member
    Premium Member

    Joined:
    Nov 18, 2007
    Messages:
    10,578
    Likes Received:
    1,163
    Welcome to our business forum dpraptor, I've moved your thread to the relevant section.

    Can you please tell us which country or state your business will be based in?
     
  4. dpraptor

    dpraptor
    uix_expand uix_collapse
    New Member

    Joined:
    Dec 29, 2010
    Messages:
    4
    Likes Received:
    0
    I am in the USA, in North Carolina.

    Thanks!
     
  5. ArcSine

    ArcSine
    uix_expand uix_collapse
    Member

    Joined:
    Jun 2, 2010
    Messages:
    233
    Likes Received:
    187
    Greetings to a fellow NC'er! Under what entity-type or form will your biz be conducted?
     
  6. dpraptor

    dpraptor
    uix_expand uix_collapse
    New Member

    Joined:
    Dec 29, 2010
    Messages:
    4
    Likes Received:
    0
    Hi Arc,

    I will be starting a partnership for some internet sites. There are some items i need right away, and was considering buying them now, but I wasnt sure if i should wait until I get the biz registered with the state and IRS.
     
  7. ArcSine

    ArcSine
    uix_expand uix_collapse
    Member

    Joined:
    Jun 2, 2010
    Messages:
    233
    Likes Received:
    187
    Buying them now shouldn't create a problem. A couple of approaches jump to mind; after the p-ship is formed....

    ....contribute the assets to the entity as a capital contribution. Assuming the partnership formation / asset contribution occurs fairly soon, the assets' FMVs will still be at your original purchase prices. Hence, for tax purposes, the partnership will have a depreciable basis in the assets which is the same as your original cost, and it'll be just as if the partnership had bought the assets itself.

    ....sell the assets to the partnership for exactly what you paid for 'em. You personally will have no gain or loss on the sale, and again, the partnership will have a cost basis equal to the price it paid to you. This is tantamount to a reimbursement to you from the partnership, for the assets.

    With the asset-contribution approach, though, you'll need to allow for the value of the transaction in the partners' capital accounts. Suppose, for example, your intention is to form a 50/50 partnership with another individual, with each contributing $1,000 as initial capital. If you contribute an asset worth $200, then your cash investment would be only $800, whereas your partner would be kicking in for $1,000 cash.

    The asset-contribution method also works well if the entity is a bit strapped for cash in its infancy (although you could also sell the assets to the partnership for a promissory note, as well).

    Caveat: Sometimes situations of this nature can inadvertently run into the so-called "mixing bowl" rules in the partnership section of the tax code. Generally, this is only a concern if you're contributing appreciated assets, which wouldn't be the case here. Still, getting a tax advisor's professional opinion wouldn't hurt.

    Cheers!
     
  8. dpraptor

    dpraptor
    uix_expand uix_collapse
    New Member

    Joined:
    Dec 29, 2010
    Messages:
    4
    Likes Received:
    0
    Great! Thanks, One of the items is a computer, which my partner needs to get this started, the other was a membership that will allow me to access information I have to have before i can begin. In this case, they are directly related to getting the business up & running, I think the contribution might be the best idea, but I will run this past the accountants I use and see what they say.
     
  9. habeebraja

    habeebraja
    uix_expand uix_collapse
    Member

    Joined:
    Dec 2, 2010
    Messages:
    67
    Likes Received:
    0
    Its a good idea,But I think buying a product before the business is not that much secure.The initial thing is to promote your business.You have to built your market to sell your product.
     

Share This Page