Determining when a business actually starts can be an important concept, both in taxes and in business valuation. You could say that your business "starts" when it first begins advertising and is ready to serve customers, even though no sales have been made. So, taking a company website live on the Internet could be the date when that business starts. But there are more specific ways to determine the start of a business, for tax and legal matters.
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.
Most businesses start on the first day of a month. Some businesses choose to start at the beginning of the year or at the beginning of a quarter (January 1, April 1, July 1, or October 1). Business financial reports (balance sheet and profit/loss statements) use the beginning of a month, so this makes it easier to do these reports.
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.
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.
Deciding on a startup date is not as easy as it sounds, because it has tax and legal implications. Get help from an attorney and a CPA before you select a specific date.