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What are Pre-Operating Expenses

The pre - operating expenses , also called up costs, pre - opening or organization, are those made before the start of operations of a company, or prior to the launch of a new initiative of an existing company.

Sometimes it is often thought that these pre-operating expenses are really investments, but this is incorrect, since these incorporation 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 the start of activities and the start of operations of a company. 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 start 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 available to it for such activity.

Pre-operational expenses are considered to be all those that are generated before the start of operations of a company, or of a new initiative promoted by an institution already registered as a legal entity.

For example, the expenses of legal procedures for the incorporation of a company can be considered pre-operational expenses.

Similarly, the preparation of the company's employees and workers in the specific area of ​​the business that will be offered to the market is also considered a pre-operational expense.

On the other hand, pre-operating expenses will not be considered, for example, those expenses in the matter of advertising that are made when the company has already started to produce, when it already has clients and sells its services.

Characteristics of pre-operating expenses
Pre-operating expenses are different from operating expenses or investments. The main characteristics of pre-operating expenses will be detailed below:

1- They are generated before the start of operations
Pre-operational 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 will expand its competencies to other markets, or launch a new product.

Then, pre-operational expenses are considered those related to the administrative procedures to create the legal entity, the expenses that are destined to attract future investors for the project in question, or those that are used in the creation of an advertising campaign, among others. .

2- They 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 cannot be called investment, because the company does not even exist yet.

Investments are associated with the resources that are dedicated to an activity of a company that is already in operation.

In the case of pre-operating expenses, said company or initiative has not yet been launched, has not provided any service or produced any sale.

No specific assets are generated through pre-operating expenses. All constitution expenses are linked to activities necessary to create the appropriate scenario for the start of operations of a legal entity.

3- They 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 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 that the actual pre-operational expenses required for the initial establishment of a legal entity are clearly defined.

To the extent that these expenses are well defined, they can be executed in the best possible way, and they will fulfill their main function: to cover all those administrative, training and promotional elements, so that a legal entity can start its operations successfully.

4- They are subject to tax deduction
Like all the accounting activity of a company, the pre-operating expenses are also elements subject to the control carried out by the pertinent tax institution.

However, pre-operating expenses can be deducted for tax purposes because they correspond to expenses generated in a period prior to the start of operations of a company.

Laws in some countries establish that pre-operating expenses can be deducted during the first year of the company's exercise, or amortized within a maximum period of 10 years, taking as the starting date the moment in which the company began its commercial activities.

5- They must be classified correctly
Since pre-operating expenses can be deducted, it is convenient to classify them correctly, so that they can be considered pre-operating expenses at the time of an audit.

The laws vary according to each country; however, pre-operating expenses in general are considered deductible because they were economic efforts made before the establishment of a new company, which means that these expenses were not incurred during the period of effective operation of said company.

Examples of pre-operating expenses
According to the classification presented above, the following are considered pre-operating expenses:

- Administrative expenses corresponding to the creation of the legal entity of a company.

- Expenses for requesting permits to be able to sow on a specific land.

- Expenses of office supplies 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 studies that determine whether or not a specific undertaking is relevant.

- Marketing and promotion expenses of a new product.

- Expenses dedicated to convincing potential investors to participate in a specific project.

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