Calculating the start-up costs for your professional organizing and productivity consulting business is important. With this knowledge, you will be able to use your resources wisely to grow your business. Additionally, it will have an impact on your tax return as certain start-up costs are tax-deductible.
Determine When Your Business Begins
Your business starts when you are available for hire; that is when you can deduct the cost of the items as business expenses.
It is important to know when you officially start your business because some start-up costs – up to $5000 are tax-deductible in the first year. The remaining costs can be deducted in equal installments (amortized) over the next 15 years. The Internal Revenue Service (IRS) explains what is and is not deductible in IRS Publication 535. You may also want to get advice from a tax accountant or bookkeeper.
What Are the Start-Up Costs?
Start-up costs are the expenses you have before you start earning income. There are two broad categories of start-up costs: capital expenditures and expenses. Capital expenditures are one-time costs to purchase long-term items (known as fixed assets) needed to run your business, such as a computer, label maker, etc. These items may not qualify as a tax deduction, but they can be written off over time through depreciation.
Expenses include fees for lawyers and accountants to help you set up your business structure and prepare and review contracts. Fees for business licensing and registration, training costs, and market research are also considered start-up expenses.
Calculate Your Start-Up Costs
The spreadsheet below contains a list of the start-up expenses and capital expenditures of a typical professional organizing business. Assign a cost to each expense. Initially, you may use your best guess but as you research and inquire about fees and prices, update your spreadsheet.
Keep in mind that you should focus on essential costs – the expenses that are absolutely necessary for you to start and grow your business. An example would be lawyer fees to ensure your client contracts are legally appropriate. Sometimes we lean toward optional costs such as the newest model of label maker when the older model works just fine. Hold off purchasing these items until you have enough client income to offset the costs.
When you calculate your business start-up costs, it’s a good idea to include at least six months’ worth of expenses – a year’s worth is better. Don’t count on your client revenue to cover your start-up costs.
One of the easiest costs to calculate are fixed costs. These are consistent from month to month and include things like rent, utilities, and internet fees. Some expenses increase as your business gets underway. These are variable costs and can be more difficult to estimate. For example, as your client load increases, you will be driving to more client appointments and putting more gas in your car. Make sure you take this into account in your calculations.
Examine Your Assets
Once you’ve got your start-up costs calculated, take a look at the money you have in your bank account (your assets). You will need this money for the start-up phase. It will pay your business expenses until you start earning income from your clients.