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TaxStartups / SaaS

Startup Cost Deduction For Entrepreneurs | Acuity

By March 4, 2024 No Comments

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’re focusing on the startup cost deduction.

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 here’s a breakdown 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. In order for them to be eligible for tax deductions, they must be associated with the following:

  1. 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).
  2. Creating or investigating the business; survey and analysis of the market, transportation facilities, products, labor supply, etc.
  3. Organizing the business; legally setting up your business as a partnership, LLC, or corporation (e.g., legal, accounting, and filing expenses)

Startup Cost Deduction and Amortization

Deducting business startup 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 (gradually write off costs) so that you can minimize your taxes over time. The last option is to hold off on both deductions and amortization of startup costs, and instead, recover these costs if you sell the business in the future. 

PRO TIP: these options no longer apply if you decide not to start or purchase the company.

Capitalizing On Startup Cost Deduction

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.

Want to make sure you’re not missing out on any deductions this tax season? We’re here to help. Simply find a time below that works for you to talk to our team about our tax solutions: