Now that tax season’s here, it’s important to familiarize yourself with all the deductions that are available. While many deductions may apply to you, today we’d like to focus on startup costs.
Starting a business can carry a hefty price tag, but the upside is that you may be able to deduct some of those costs from your business tax return. We know the details can be confusing, but we’ll break things down for you.
What’s considered a business startup cost?
According to the IRS, startup costs are, “amounts paid or incurred for (a) creating an active trade or business, or (b) investigating the creation or acquisition of an active trade or business.” For these deductions to apply, you have to have opened your business.
These costs are considered capital expenditures and in order for them to be eligible for tax deductions they must be associated with the following:
- Preparation for opening the business; advertising, employee training, travel costs associated with finding distributors and suppliers, and professional service fees (e.g., accountants and attorneys).
- Creating or investigating the business; survey and analysis of the market, transportation facilities, products, labor supply, etc.
- Organizing the business; legally setting up your business as a partnership, LLC, or corporation (e.g., legal, accounting, and filing expenses)
Startups Costs Deduction and Amortization
Deducting these costs only applies if the startup costs don’t exceed $50,000. The IRS allows for a deduction of up to $5,000 for organizational expenses and up to $5,000 for business startup costs. If it exceeds $50,000, then there’s a phase-out of the $5,000 first year deduction. Any remaining costs more than the $5,000 deducted in the first year are amortized on a straight line basis over 180 months.
If you’re not profitable in your first year, you have the option to amortize so that you can minimize your taxes over time. And the last option is to hold off on both deductions and amortizations and recover these costs if you sell the business in the future. These options no longer apply if you decide not to start or purchase the company.
Many business owners are unaware of the deductions that are available to them and often leave money on the table. Always be sure to consult with your tax CPA to see what options you have available so that you don’t miss out. It’s essential to be proactive from the very start of your business by keeping good and accurate records.
Additional Tax Resources That You May Find Helpful:
- Small Business Tax Deductions & Credits That You Might Be Missing
- Founder Stock: The Tax Break You Shouldn’t Overlook
- Your Small Business Tax Preparation Checklist
- The 1099 Form: Everything You Need to Know About Filing
- Free Quarterly Tax Payment Calculator
- Here’s the Best Time to Get Tax Advice From Your Small Business CPA
- Meet the Team: Acuity’s Tax Experts
- Explore Our Tax Services