Determining the Business Established Date for Tax and Financial Purposes.
Understanding the exact date when your business officially begins is crucial for both tax purposes and business valuation. Your business “starts” when it advertises and stands ready to serve customers, even if no sales have occurred. For instance, launching a company website could mark your business’s commencement. However, more specific criteria exist for tax and legal purposes.
Business Startup and Registration
Typically, the business established date is the date on your business registration documents. Partnerships, LLCs, and corporations must register with their state. The effective date is usually the state filing date, although you can select an alternate effective date.
For federal tax purposes, most businesses must register with the IRS and obtain an Employer ID Number (EIN). Line 11 of this form asks for the date when the business started or when ownership changed. It’s the business owner’s responsibility to determine the start date.
Note
Most businesses start on the first day of a month. Some prefer the beginning of the year or a quarter (January 1, April 1, July 1, or October 1). This simplifies financial reporting, as business reports typically use the start of a month.
According to the IRS, a corporation begins on its incorporation date—the date when the state recognized and filed the business registration. However, the IRS may also consider the acquisition of necessary operating assets as an indication that the business has started. They evaluate each case based on its circumstances.
Business Startup and Fiscal Year
The year your business starts is its first tax year, known as the fiscal year. The business fiscal year is significant for carrying business losses into previous years. In this context, the exact date is less critical than the year itself.
If you had business activity last year, such as major expenses or a client, you should have filed a tax return for that year to establish the start date and claim a business tax loss.
Business Start Date and Startup Costs
The business established date is vital for determining whether startup costs are deductible. According to the IRS, you can deduct startup costs paid or incurred for:
- Creating an active trade or business,
- or Exploring the establishment or acquisition of an active trade or business.
These costs must be paid before your business begins, making it essential to establish that date.
Note
Most startup costs need to be amortized over time, but you can deduct up to $5,000 of startup costs and $5,000 of organizational costs in your first business year. Refer to IRS Publication 535 – Business Expenses for more information.
The Concept of Going Concern
The concept of a going concern helps determine when a business starts. A going concern is a business that operates with the expectation of continuing indefinitely. It has an active customer base, engages in advertising and marketing, and generates revenue from sales.
A going concern does not need to be profitable but must demonstrate the intent to operate for profit.
A business can be said to start when it becomes a going concern—when it begins operating independently with the aim of making a profit, maintains business records, and actively solicits customers.
Bottom Line
The year in which you start your business is crucial. The selection of income and expenses between one year and the next impacts taxes, but beyond that, you can choose your own start date.
Note
Deciding on a startup date isn’t as straightforward as it seems due to its tax and legal implications. Consult an attorney and a CPA before finalizing a specific date.
