How do I get the startup costs and purchases I paid for personally before the business opened into the books?

What are the two sides of each entry?

Every purchase enters the books as a pair of lines. The IRS's Publication 583, Starting a Business and Keeping Records, calls double-entry bookkeeping self-balancing because you record every transaction as a debit entry in one account and as a credit entry in another. For something you paid for personally, the debit is what the business got: an expense, an asset or a prepaid amount. The credit is your funding, because no business account paid.

The funding side cannot be left off. Publication 583 says a balance sheet shows the assets, liabilities, and your equity in the business on a given date, and your funding belongs in one of the last two: money you put in, or money the business owes you. Record only the cost and the books do not balance. Post the funding to a catch-all opening or suspense account and, a year later, nobody can say whether you are owed that money. Clearing an unexplained opening balance equity account is a separate question.

How do you sort what you bought?

Sort each purchase by what it had produced by the day you opened:

The Financial Accounting Standards Board's guidance on start-up costs, ASC Subtopic 720-15, as the federal bank regulators' Call Report glossary (FFIEC) summarises it, says costs of start-up activities, including organization costs, should be expensed as incurred, and that the costs of acquiring fixed assets and getting them ready for their intended use are not start-up costs, though the cost of using such assets that is allocated to start-up activities, such as depreciation, is itself a start-up cost. So pre-opening costs are not held as assets, and equipment is not expensed because it was bought early. The SEC's Beginners' Guide to Financial Statements explains that companies spread the cost of such assets over the periods they are used.

A refundable deposit, such as a lease security deposit, is neither used up nor a payment for a period: it is money the business expects back, so it goes on the asset path. The SEC's guide defines assets as things that a company owns that have value.

For amounts covering months after opening, name your basis. Publication 583 says you must use the same accounting method to figure your taxable income and to keep your books, and that if an inventory is necessary to account for your income you must generally use an accrual method for purchases and sales; you choose the method when you file your first income tax return, and the books follow it. On the accrual basis, the recommended practice is to record a prepaid asset and move each month's share to expense as that month passes after opening. On the cash basis, Publication 583 says you usually deduct or capitalize expenses in the tax year you pay them, and the IRS's Publication 538 says that under the cash method you may not be able to deduct an expense paid in advance; whether a prepaid balance is carried is settled with your accounting method.

A pre-opening bill still unpaid when the books start was not paid by you, so it is not on this schedule; it belongs with your opening balances, a separate question.

What value does an item still held enter at, and what supports it?

The Call Report glossary's summary of ASC 720-15 says the costs of acquiring fixed assets and getting them ready for their intended use are not start-up costs, so they stay with the item rather than being expensed as start-up costs. For tax, the IRS's Publication 551, Basis of Assets, says the basis of property you buy is usually its cost, and lists amounts your cost also includes, such as sales tax, freight, and installation and testing.

The support is the invoice plus the statement line showing your payment. Publication 583 says you must keep records to verify certain information about your business assets, starting with when and how you acquired the asset and its purchase price. For opening inventory, it says supporting documents should show the amount paid and that the amount was for inventory.

Something you owned and used personally before the business, rather than bought for it, is different: what you once paid is not automatically its value. For tax, Publication 551 says that if you convert property held for personal use to business use or use it to produce rent, you must figure its basis for depreciation, which is the lesser of its fair market value on the date of the change or your adjusted basis on that date. That is a tax rule for figuring depreciation when you change the use of your own property; it does not set the item's book value or say how it applies when you contribute the item to a separate entity. Decide the value before you record the item, keep what supports it with the schedule line, and leave its tax basis to the return.

How does your start date decide which period the spending falls in?

The date you began operating is the line between start-up spending and ordinary operating spending. Publication 583 defines business start-up costs as the expenses you incur before you actually begin business operations.

Because the Call Report glossary's summary of ASC 720-15 has start-up costs expensed as incurred, record each on its own date, so your books need to start early enough to hold the earliest item that belongs in them. Items still held and any prepaid balance carry across the start date: prepaid months begin moving to expense from opening, and equipment's cost is spread over the periods it is used.

For tax, the date your active trade or business began is its own determination, made under section 195 of the Internal Revenue Code and Treasury regulations; the book entry does not fix it. When spending and opening fall in different years, the book year and the return year for a cost can differ.

Is your funding a contribution or an amount the business owes you?

The credit side has to say which. Funding you put in with no repayment expected is a contribution to equity. Funding the business is to repay you is a liability, which the SEC's guide defines as amounts of money that a company owes to others.

What turns on it is what the entry leaves behind. A liability stays on the books until the business repays you. A contribution leaves nothing owed and becomes part of your equity.

Decide which it is, and write it down, before you post; the entry cannot be completed without it. What makes an arrangement a loan rather than equity, whether a business that is not a separate entity can owe its owner at all, and how each is recorded afterwards, are covered in the related question on owner loans and equity.

What documentation ties a receipt in your name to the business?

With no business account, each item's record has to show what was bought, that you paid for it, and that it was for the business. Publication 583 says supporting documents should show the amount paid and that the amount was for a business expense. It adds that if you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions, which must be highly legible. For a check, the statement must show the check number, amount, payee's name and the date the check amount was posted to the account. For an electronic funds transfer, it must show the amount transferred, payee's name and the date the transfer was posted. For a credit card, it must show the amount charged, the payee's name and the transaction date.

For each item, keep these together:

• The receipt or invoice, even if it is in your name
• The statement page and line showing your payment
• A note of what the item was for in the business
• The schedule line recording how it was funded

Publication 583 says proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction, and that you should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. Publication 583 does not say how a document in your name shows that an entity incurred the cost, so this four-part record is recommended practice, not a rule it states.

If the entity already existed but had no bank account yet, say in the note that you paid on the entity's behalf and for what. If the purchases sit on a card or account you still use personally, never enter the statement or its total. Extract each business line to the schedule with its statement date and line number, and leave the personal lines out. Which receipts the IRS accepts in general, and when one is required, is a related question, and keeping business and personal spending apart from here on is another.

What changes if you spent the money before the entity existed?

This arises only when a separate legal entity, such as an LLC or corporation, was formed after some of the spending. Before formation there was no entity to incur the cost, so it was yours, and it becomes the entity's only if the entity takes it up. Whether and how it can is a matter of your state's entity law and your governing documents.

Delaware's Limited Liability Company Act, for example, lets an LLC agreement be entered into before the certificate of formation is filed and made effective as of the effective time of that filing or another time or date the agreement provides. That provision, § 18-201(d), does not itself say whether or how the LLC takes up spending made before it was formed. Check your own state's statute rather than assume Delaware's rule applies, and establish what it and your governing documents require for the entity to take these costs up. Until then, keep the pre-formation lines on the schedule, marked as pre-formation, and out of the entity's books. An adoption record that lists each item by its schedule line and says whether it is treated as contributed or to be repaid is recommended practice, not a requirement of § 18-201(d).

For tax, a corporation's or partnership's own costs of coming into existence are measured against separate definitions: a corporation's organizational expenditures in section 248 of the Internal Revenue Code, and a partnership's organizational expenses in section 709. Whether a given cost meets them is decided for the entity's return, not by the entry.

How do you build the schedule and record it?

Work from the evidence to the entries, in this order:

1. Fix the date you began operating and, if you have an entity, the date it was formed.
2. Gather the statements for every personal card and account you used, from your first business purchase to opening.
3. Mark each line that was for the business and find its receipt or invoice.
4. Enter each on the schedule with its date, payer and account, evidence reference, description, class and amount.
5. Flag any line dated before the entity existed.
6. Decide, and write down, whether your funding is a contribution or an amount owed back.
7. Post one entry per schedule line on its own date (for a line dated before the entity existed, on the date settled with its adoption), and check that the entries total the schedule lines posted so far.
8. File the schedule with the receipts and statement copies it cites.

One entry per line matters: Publication 583 describes a journal as a book where you record each business transaction shown on your supporting documents. A single lump labelled "startup costs" cannot be tied to anything when it is questioned.

What does a finished schedule look like?

A café that opened on May 1, run by an LLC formed on Feb 10, might list:

Lines S-2 to S-4 total 4,210.00 and are posted below. S-1 is posted only once the LLC's adoption is on record. Decide the date S-1 enters the LLC's books as part of that adoption, and write it on the schedule line.

What do the entries look like?

The credit goes to owner's capital if your funding is a contribution, or to a due-to-owner liability if the business is to repay you; the amount is the same. Entries 1 and 2 are the same on the cash and accrual bases, because both were paid in full before opening.

Entry 1, a cost used up before opening:

Entry 2, an item still held at opening:

Entry 2 records the oven at what you paid, delivery and installation included, as Publication 551 counts cost for tax; have your accountant confirm its value in your books.

Entry 3, the software, on the accrual basis (the May 31 lines repeat at each month-end until all 12 months, 30.00 each, have moved to expense):

Does recording the spending settle its tax treatment?

No. The entry records what happened; the return applies its own rules, and how it classifies and times a cost can differ from the book entry. For tax, section 195 of the Internal Revenue Code says that, except as otherwise provided in that section, no deduction shall be allowed for start-up expenditures, and Publication 583 says business start-up costs are generally capital expenses. Publication 583 also says you usually recover costs for an asset such as machinery or office equipment through depreciation, and Publication 538 has its own rule on when an expense paid in advance is deductible.

Three things are determined separately, for the return:

• Which tax category each item falls in: start-up cost, organizational cost, depreciable property or something else
• The date your active trade or business began
• How much is deducted, and how the rest is recovered

Use the same schedule for those decisions, but do not read any of them from the book classification.