COSTS AND THEIR TAX TREATMENT In considering any potential decision to start and operate a child care business it is useful to look early at the kinds of costs which can be sustained and their potential deductibility from business income taxes as together these two aspects of cost will affect both the entry decision and the realities of going concern operations. There are two important federal tax code sections that both help to identify costs and also to identify the potential deductibility of those costs against income taxes owed from the business’ activity. Section 195 of the Internal Revenue Code provides for deductibility of “startup expenditures” which it defines [Section 195(c)] as “any amount paid or incurred in connection with investigating the creation or acquisition of an active trade or business, or creating an active business, or any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of such activity becoming an active trade or business, and which, if paid or incurred in connection with the operation of an existing active business (in the same field as the trade or business)…would be allowable as a deduction for the taxable year in which paid or incurred.” Examples of such expenditures include: licensing fees, cost of business formation and registration, inspection fees, supplies, and pre-opening payroll expenses. Starting a child care business can be capital intensive requiring substantial outlays of money up-front. This is particularly true if physical construction or rehabilitation of a home is required. In making an entry decision one should remember that such costs are “sunk costs” that cannot be recouped (at least not totally) if you decline to go forward with the business or later exit the business. Section 162 allows a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year for carrying on any trade or business.” That section identifies as “ordinary and necessary expenses” salaries and compensation, travel costs in the conduct of the business, rent for property used in the business in which the taxpayer has no equity. The Treasury Regulations expand the list to include
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