What are pre-operational costs?

Pre-operating 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, pre-operating costs are limited only to those expenses that would be treated as normal business expenses under standard accounting principles if the business were already in operation. This helps to prevent companies from deducting non-business related costs such as purchasing a luxury car that is used to scout out some potential office locations for the new business. Pre-operation costs are also known as start-up costs or pre-opening expenses.

All types of business entities may incur pre-operational costs. These expenses often include consulting fees that are paid to experts and consultants during startup. They can also include money paid to lawyers, who draft partnership and partnership agreements, create company bylaws, and file articles of incorporation for new companies. Pre-trade expenses may also include accounting costs incurred when preparing to apply for a business loan or when assessing the creditworthiness of potential investors.

Fees paid to government agencies may also be included in pre-operational costs. New companies often spend money to apply for licenses from city, state and federal authorities. State agencies generally charge a fee when new companies apply for incorporation or registration of a business name. Partners or directors of a new company may also include expenses related to meetings and planning sessions as part of their pre-operational cost calculations.

In terms of financial reporting, pre-operating costs are treated differently on tax forms than they are in the company's accounting records. International financial reporting standards require companies to treat pre-operating costs as expenses as those costs occur. If the company pays for the upfront services in advance, the costs must be treated as assets on the balance sheet until the service is received. At this time, it is treated as a normal expense.

For tax purposes, pre-operating costs are treated as assets. As these costs are part of the entrepreneur's initial investment, tax codes group these costs together with the costs of equipment and other forms of capital. Some tax codes allow the company to deduct a small portion of these expenses when incurred, while the remainder is listed as assets on the balance sheet. This asset depreciates over time, just like other types of assets.

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