Can I write off start-up costs?

Q: Can I write off the money I’ve spent to research and prepare to startup my new small business?

A: Yes, you can claim tax deductions for, i. e., “write off,” amounts incurred in connection with investigating, creating or acquiring an active trade or business before you begin operating.  But the tax and accounting rules for startup costs are complex, so you should consult with a CPA.

For tax years beginning in 2010, you can write off up to $10,000 in startup costs and another $10,000 in organizational expenses in the year that you start your business. These deductions are reduced if you have more than $60,000 of either type of expense.  Any costs over the $10,000 limits will have to be amortized, or spread out, over 15 years.

Sound like a long time to have to wait to get the full benefit of a startup deduction? It is. But most small business startups typically don’t have much more than $10,000 in total pre-opening costs and can live with these rules.

Startup and organizational costs incurred by new businesses are generally treated as capital expenses. Therefore, they need to be amortized, that is, part of the cost is “written off” in each of a number of years.

Startup expenses include such things as the cost of travel, trade shows, educational or training seminars, consulting fees, building costs, and supplies or materials needed to get your business started (not inventory or raw materials).

Organizational fees include the costs relating to forming or creating the business, such as, fees paid to obtain licenses, and accounting or attorney fees paid to form a legal entity for your company.

But, from a tax standpoint, when does your business actually begin? You can be in business if you are ready to accept customers. The actual event that triggers you being in business will vary by the type of business and your own personal way of operating.

You don't have to have customers or made a profit to be in business, but, if you don't make a profit in three out of five years you could trigger the hobby-loss rule and face restrictions on your startup tax deductions.  Review your situation with a good tax pro.

In any event, it should be clear that, for those investigating or starting up a business, it’s important to keep good records of your costs or you will have difficulty recovering all of them.

How to deal with burn-out

Q: I’ve worked hard for several years to build up my business, but the long hours, missed weekends and pressure-packed deadlines are wearing me down. What can I do?

A: There are a great many rewards in running your own business.  But you must also be aware of the trade-offs and sacrifices that come with being in charge.  Over time, the stress and strain may take their toll on your physical and emotional health, affecting relations with your employees, family and friends as well as impacting your business. Fortunately, there are many good ways to keep business burnout at bay. 

First, identify those responsibilities or activities that are causing the stress. What aspects of running your business regularly cause discomfort or even anxiety? Perhaps you dread mundane tasks like bookkeeping and filing reports, or having to make sales calls. You may have customers who are difficult to work with, or do not pay invoices on time. And, because you are responsible for everything your business does, you may find yourself obsessing about things beyond your control.

One cure for an overburdened mind is to shed some of your responsibilities.  Members of your staff with specific skills or leadership potential may be good candidates to take on certain functions. Consider using a company that specializes in offloading the administrative work of businesses. If you’re a solo entrepreneur, it may be time to hire your first employee or outsource to a part-timer.

Schedule some “me” time and stick with it. You follow a regular maintenance schedule for your equipment, so why not treat yourself the same way? A monthly lunch get-together with colleagues and designated family nights are great ways to get your mind off business issues and reconnect with the people who matter most to you. Even a quick walk around the block will do wonders to refresh your mind and spirit.

Sometimes, problems or challenges aren’t the cause of burnout; it’s the lack of them.  Look for new challenges to stimulate your interest and energy. Recapture the thrill you experienced when starting your business by considering expanding or enhancing your products or services. Make sure you plan staffing and resources to support any new venture, however, so you don’t unnecessarily add to your workload.

Seek advice from experts, mentors or experts. Many sources of burnout are common to entrepreneurs and you can learn much from their experience. SCORE offers many valuable resources to help you resolve your small business dilemmas.

Anticipate Trends to Capture New Business

Q: My small business has been relatively successful so far. What’s the key to remaining successful?

A: Owners of new and growing small businesses today know one thing for sure: conditions on the business playing field can change rapidly. The technology that seemed cutting edge last year is now outdated; or worse, obsolete. Buyer moods can swing dramatically, and marketing strategies are in constant flux.

Anticipating trends can be extremely valuable in keeping you current on everything from sales strategies and customer desires to technology tools and the general economy. As your business grows, change will be inevitable and small business owners should constantly look ahead and seek out ways to shake things up.  You need the attitude that whatever is done today can always be done better.

But how can you tell the difference between a fleeting fad and a true trend? Louis Patler, a market research guru for companies such as American Express and Dell, has spent decades tracking emerging trends and studying their impact on business. He says the key to successfully piloting a business in the years ahead will be embracing new ways of thinking.

For example, Patler says that truisms like “stick to what your business does best” are outmoded. If you want your business to grow, consider that past business traditions and processes might only hold you back. Trying new approaches is vital.

Not all customers are created equal. Some are more valuable and loyal than others, and those are the ones you should lavish the most attention on with special savings and service offers.

Advances in technology will continue to radically change how small companies do business. You will need to keep up. Small business owners who know how to acquire and manage information will achieve the most success. Capturing and analyzing data about customer needs, wants, behavior and how they use your product or service will become increasingly critical.

And just as your customers will put pressure on you, you should challenge your suppliers to find ways to reduce their prices, improve their delivery times, or evolve their materials or services to better meet your changing requirements.

To get ideas about new products, services or markets talk to your customers and suppliers, attend trade association meetings, and read trade journals and other materials. Anticipating trends in the business environment is not easy but is essential in remaining successful over the long term.

Why buy a failing business?

A SCORE client told me recently that a friend of hers suggested that she consider buying a business that was not doing well. She asked me why she would ever want to do that.


Well a failing business might present an attractive investment opportunity for any number of reasons. When businesses for sale are failing, i. e., they have low or negative cash flow to the owner, you need to look under the cover to see what’s really going on in the business. The reasons the business is struggling could be correctable by the right buyer. And, if that’s the case, you need to make sure that what you are buying, with the necessary adjustments, will fit into a business plan that you believe will be successful.

Actually, the evaluation you should conduct is not much different than if you were considering buying a business that is profitable. You may find that the strong earnings of a successful business is based on factors which are temporary or depend on skills which you don’t have or are difficult to acquire.

A business may be failing because of owner mismanagement. Perhaps the owner doesn’t have the marketing skills needed to boost sales or maybe is not managing inventory in a cost effective way. This could create an opportunity for a motivated buyer with the capability to properly manage the business.

The owner may just be burnt out and may not have the energy to make the adjustments needed to improve the business. For instance, a business owner I visited recently has been running his business for a long time. His market has changed but he doesn’t want to make the investment in time and money to advertise and take orders over the internet even though the rest of his business infrastructure will support this. Again, this could be a good opportunity for the right buyer.


Sometimes early stage businesses fail because they run out of cash and can‘t raise more capital. This can happen even though their sales volume is growing nicely and can reasonably be expected to continue to grow. But a seller may have a long term lease or a loan payment that he or she can’t support any longer. A buyer with the financial resources and the know-how can treat the business as a startup but with a head start, thereby, avoiding many of the headaches entrepreneurs normally encounter when starting from scratch.

Of course, your evaluation may discover that a business is failing for reasons that can’t be easily resolved. In this case, you just keep looking for that good investment opportunity. There are many of them out there.

Why prepare a business plan?

Q: My partner and I are planning to start our own business in a field in which we are very experienced. We don’t need financing, so why should we spend time preparing a business plan? My father didn’t have a business plan when he successfully started and ran his business many years ago.


A: Starting your own business can be the most rewarding experience of your life or it could become your worst nightmare. Though the overall statistics vary, at a minimum, half of the small businesses fail within the first two years and 80% fail within the first five years.

Why do so many small businesses fail?

Business is risky, especially starting a new one. You may be risking your own, someone else’s, or borrowed money, but, at the very least, you are risking your own time, energy and self-esteem.

Many things have to go right for a business to succeed. You need the right idea, right market, right place, right time, right management and right amount of capital.

A well prepared business plan will help you answer these questions and reduce the risk. The value of a business plan lies in the thought process – not necessarily in the finished document. The disciplined, systematic approach helps you, and your advisors, to think things through thoroughly, to research to ensure all relevant facts are known and correct, and to look at your ideas critically.

So taking prudent steps to prepare an appropriate business plan which increases your chances of success would seem to make good sense.

A business plan does not necessarily guarantee success - you can start up successfully without one and you can fail with a good one. It simply increases your odds of success.

And, of course, business planning does not stop with a successful startup. Our business environment is always changing. The process of keeping your business plan current will provide you with a good decision making tool to deal with new challenges and opportunities when they arise.

Get help in preparing a business plan by attending SCORE educational events and using our free counseling services. Visit the SCORE website, www.scorehouston.org, where you will find training schedules, useful templates, links and other information to help you deal with many business issues including preparing a good business plan.

Lessons from an experienced entrepreneur

My SCORE colleague, Irwin Miller, spoke at a luncheon some time ago about his long and very successful career in the pharmaceutical business in Houston. He spoke about his struggles to get started and the difficulties and many successes along the way. He concluded by identifying several key lessons based on his experience in running a successful small business.


• Hire good people. Effectively managing people is, of course, very important in running small businesses but it all starts by hiring trustworthy, hardworking, and capable people in the first place. If you don’t, you’ll spend more time doing their job than doing yours.


• Constantly improve. Irwin says, “If it’s not broken, fix it.” If it works today, it may not work tomorrow because the environment is always changing. You need the attitude that whatever is done today, can always be done better.


• Always innovate. Finding new ways of doing things is the best way to beat competition. The market rewards those who are the first to produce a new and valuable product or service.


• Put the customer first. Business starts and ends with your customers. If they feel they are your first priority they will keep coming back. Understand their needs and do everything you can to satisfy them. Satisfied customers are your most effective marketing tool and often are the best source of information for improving your business. So, ask them what you can do better.


• Take care of internal customers. Internal customers are your employees, suppliers, and service providers who are indispensable to operating a profitable business. Treat them well and they’ll spend that little extra effort to get the job done well and help you through difficult situations.



• Always keep commitments. Never let anybody down even if you have to eat some additional expense or spend some extra time to do what you promised. Your word must be golden and is essential to building a good, long-term reputation.


• Work hard. Most small businesses require a tremendous effort by the owners especially in the early going. You’ve got to attend to all the little details. Running a small business is not for the faint of heart. There will be many bumps along the road but you need to keep plowing through to succeed.


Other successful business men or women may have other key points but they won’t be too dissimilar to Irwin’s.

Common Mistakes Small Businesses Make

Q: Now that I’ve gotten through the startup phase, what are some of the most frequent mistakes made by small business owners?


A: Our SCORE counselors talk to small business owners from time to time who may be struggling for a variety of poor decisions they may have made. While the list is long, the following are a few of the more common and serious mistakes we see.

People usually start with enough money to open the door, but often not enough to keep the door open. Their customers are happy, sales are growing, and they may even have broken even. Then that unexpected expenditure appears or a large inventory invoice or tax payment comes due, but there’s no money in the bank! Things snow ball from there and the business is in real trouble. The bank won’t lend them more funds, vendors won’t extend credit or a big customer won’t or can’t pay his invoice on time. They needed more contingency in their working capital budget at startup.

Sometimes, they stop planning. In particular, they don’t continue doing the kind of market research they did before they started up. So something in their environment starts changing and they are not aware of it. Their competition adjusts to the change before they do and takes the advantage. Our business environment is always changing and we need to frequently reassess where we are and where we are going to stay on the right track.

Why do they stop planning? Often it’s because they spend so much time running their business that they can’t find time to manage their business. They are so deeply involved in the operations they can’t see the future. Small business owners need to set aside specific time to attend to the management functions that keep their businesses running smoothly.

Sometimes the owner burns out and the business starts deteriorating. Owners can spend an enormous amount of time and energy starting and running a small business. This can take a heavy toll on the owners. Owners need to take time to relax and enjoy family and friends to recharge those business batteries.

And then they don’t seek timely advice. Small business owners need trusted advisors or mentors. They need someone to provide them objective opinions, someone they can bounce ideas off of. Family and friends may not always provide that unbiased opinion. Your advisors might include your attorney, accountant, banker or SCORE counselor. And keep your mentors informed so they can provide timely advice when needed.