This is a great question and one that does not have a simple answer. The reason being is that there is no one-size-fits-all answer to this question - it depends on the type of business, the industry, the country, and a number of other factors.
Generally speaking, startup costs can either be expensed or capitalized. Expensing means that the costs are charged against the income of the business in the year that they were incurred. This means that they will reduce the profits of the business for that year. Capitalizing means that the costs are recorded as an asset on the balance sheet of the business and are then depreciated over time.
The main thing to consider when deciding whether to expense or capitalize startup costs is whether the costs are considered to be part of the normal course of business. If the costs are considered to be part of the normal course of business, then they should be expensed. If the costs are not considered to be part of the normal course of business, then they should be capitalized.
There are a number of factors that should be considered when making this decision, including the following:
The nature of the business: If the business is of a type that regularly incurs startup costs (such as a restaurant or a manufacturing business), then it is more likely that the costs will be considered to be part of the normal course of business and should be expensed.
The amount of money involved: If the startup costs are relatively small, they are more likely to be considered part of the normal course of business and should be expensed. If the startup costs are very large, they are more likely to be considered as part of the long-term investment in the business and should be capitalized.
The timing of the costs: If the startup costs are incurred close to the start of the business, they are more likely to be considered as part of the long-term investment in the business and should be capitalized. If the startup costs are incurred further down the road (after the business has been up and running for a while), they are more likely to be considered as part of the normal course of business and should be expensed.
The expected life of the costs: If the startup costs are expected to be incurred every year (such as rent), they are more likely to be considered as part of the normal course of business and should be expensed. If the startup costs are for something that will be used for many years (such as machinery), they are more likely to be considered as part of the long-term investment in the business and should be capitalized.
The country: In some countries, such as the United States, there are tax incentives for businesses to expense startup costs. This means that businesses in these countries are more likely to expense their startup costs. In other countries, such as Canada, there are no such tax incentives, and so businesses are more likely to capitalize their startup costs.
The bottom line is that there is no easy answer to this question. The decision of whether to expense or capitalize startup costs depends on a number of factors, and each business will need to consider these factors in order to make the best decision for their particular circumstances.
