The pre-operating expenses , also called constitution, pre-opening or organizational expenses, are those made before the start of operations of a company, or before the launch of a new initiative of an existing company.
It is sometimes thought that these pre-operating expenditures are actually investments, but this is incorrect, because these formation expenses are limited to that period in which the company in question has not yet begun to produce.
It is important to understand the difference between starting a business and starting a business. In the case of the start of activities, this is related to the moment in which the company is legally registered as a legal entity.
On the other hand, the beginning of operations of a company refers to the moment in which it begins to be productive; that is, it begins to sell products or to market the services of which it has for such activity.
Preoperating expenses are considered to be all those generated before the start of operations of a company, or a new initiative propelled by an institution already registered as a legal entity.
For example, the expenses of legal procedures for the formation of a company can be considered pre-operational expenses.
Likewise, it is also considered a pre-operational expense the preparation of employees and employees of the company in the specific area of the business that will be offered to the market.
However, pre-operating expenses will not be considered, for example, advertising expenses incurred when the company has already started to produce, when it already has customers and sells its services.
Characteristics of pre-operating expenses
Pre-operating expenses are different from operating expenses or investments. The main features of pre-operating expenses will be detailed below:
1- They are generated before the beginning of operations
Preoperative expenses are called that way precisely because they refer to all those that are made before the start of operations of a company.
An expense can also be considered pre-operational when it comes to a company that already exists, but that will expand its competencies to other markets, or launch a new product.
Preoperating expenses are therefore considered to be those relating to the administrative procedures for creating the legal entity, expenses intended to attract future investors for the project in question, or those used in the creation of an advertising campaign, among others .
2- Are not investments
Pre-operating costs will always be considered expenses. The resources that are available for the activities prior to the beginning of the commercial activity of a company can not be called an investment, because the company does not even exist.
Investments are associated with resources that are devoted to an activity of a company that is already in operation.
In the case of pre-operational expenses, this company or initiative has not yet been launched, has not provided any service or produced any sales.
Pre-operating expenses do not generate any specific assets. All constitution expenses are linked to activities necessary to create the appropriate scenario for the start of operations of a legal entity.
3- Must be necessary expenses
All pre-operating expenses must be strictly necessary expenses. The beginning of a project, the opening of a company or the establishment of a new initiative within an organization will always be a scenario full of challenges.
In this challenging scenario it will be necessary to use the resources in the most efficient and productive way possible, in order to guarantee the success of the initiative in question.
For this reason, it is important to define very clearly what the pre-operating expenses actually required for the initial establishment of a legal entity will be.
To the extent that these expenses are well defined, they can be executed in the best possible way, and will fulfill their main function: to cover all those administrative, training and promotional elements, so that a legal person can start its operations successfully.
4- They are subject to tax deduction
Like all accounting activity of a company, pre-operating expenses are also subject to the audit carried out by the relevant tax institution.
However, pre-operating expenses can be tax deducted because they correspond to expenses generated in a period prior to the commencement of a company's operations.
Legislation in some countries establishes that pre-operating expenses can be deducted during the first year of the company's business year, or amortized over a maximum period of 10 years, taking as the start date the time at which the company started its business activities.
5- Must be classified correctly
Since preoperating expenses can be deducted, it is convenient to classify them correctly, so that they can be considered pre-operational expenses at the time of an audit.
Legislation varies by country; however, pre-operating expenses are generally considered to be deductible because they were economic efforts made before the start of a new business, which means that these costs were not incurred during the period of effective operation of that company.
Examples of pre-operating expenses
According to the classification presented above, the following are considered pre-operational expenses:
- Administrative expenses related to the creation of the legal entity of a company.
- Expenses for applying for permits to be able to plant in a specific field.
- Expenses of office material used before the opening of the business.
- Expenses generated by the training of company personnel.
- Expenses for moving the company to a new location.
- Expenses for services of the physical space that is being prepared for the start of operations of the company.
- Expenses for market research that determine whether or not a specific venture is relevant.
- Marketing expenses and promotion of a new product.
- Expenditures to convince potential investors to participate in a given project.
References
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- Bernardo, A."Preoperative expenses: For the purpose of deduction, do you need income?"(March 29, 2016) in Soslegal. Recovered on 7 September 2017 from Soslegal: soslegal.com.pe
- London, C."A company that has not carried out taxed operations because it is in a pre-operational stage, can assume as tax credit the amount of VAT paid in its purchases and reception of services?"(24 October 2016) in Management and Taxes. Recovered in 7 September 2017 of Management and Taxes: gerenciaytificados.blogspot.com
- Sambuceti, L."Tax treatment applicable to pre-operative expenses by expansion of activities"(2015) at Universidad San Martín de Porres. Retrieved on 7 September 2017 from Universidad San Martín de Porres: derecho.usmp.edu.pe
- "How should you account for expenses incurred in setting up a business?"In Management. Retrieved on 7 September 2017 from Management: gerencie.com
- "Preoperative will always go to the expense: IFRS for SMEs"(15 July 2015) in Update. Retrieved on 7 September 2017 de Update: actualícese.com
- "Preoperative expenses are not lost!"(August 6, 2013) at IDC online. Retrieved on 7 September 2017 from IDC online: idconline.mx
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- Hate, M."Preoperative expenses"in Nation. Retrieved on 7 September 2017 from Nation Nation
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- "Pre-opening expenses"in Business Dictionary. Retrieved on 7 September 2017 from Business Dictionary: businessdictionary.com.