Pre-operational costs are expenses incurred during the start-up of a new business, including research, formation, and registration costs. They may include consulting fees, legal fees, accounting costs, and fees paid to government agencies. Pre-operating costs are treated differently on tax forms than on company accounting records, with international financial reporting standards requiring them to be treated as expenses and tax codes treating them as assets.
Pre-operational costs include any expenses incurred during the start-up or formation of a new business. They include expenses related to researching a potential new business, as well as actual costs associated with forming or registering the business. In general, these costs are limited to only those expenses that would be treated as normal business expenses under standard accounting principles if the business were already in operation. This helps prevent businesses from deducting non-business costs, such as the purchase of a luxury car that is used to scout out some potential office sites for the new business. Pre-operation costs are also known as startup costs or pre-opening expenses.
All types of business entities may incur pre-operational costs. These expenses often include consulting fees paid to experts and advisors at startup. They can also include money paid to lawyers, who draft corporate and partnership agreements, create company bylaws, and file articles of incorporation for new companies. Pre-transaction expenses may also include accounting costs incurred while preparing to apply for a business loan, or when evaluating the creditworthiness of potential investors.
Fees paid to government agencies may also be included in pre-operational costs. New businesses often spend money to apply for permits from city, state, and federal authorities. State agencies typically charge a fee when new businesses apply to incorporate or register a business name. Partners or directors of a new company may also include expenses related to meetings and planning sessions as part of cost calculations.
In terms of financial reporting, pre-operating costs are treated differently on tax forms than they are on company accounting records. International financial reporting standards require companies to treat pre-operating costs as expenses as these costs occur. If the company prepays for startup services, the costs should be treated as assets on the balance sheet until the service has been received. At this time, it is treated as an ordinary expense.
For tax purposes, pre-operating costs are treated as assets. Since these costs are part of the business owner’s initial investment, tax codes lump these costs in with the costs of equipment and other forms of capital. Some tax codes allow the business to deduct a small portion of these expenses when they are incurred, while the rest are listed as assets on the balance sheet. This asset depreciates over time just like other types of assets.
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