Starting your own business is exciting, and expensive. Get your business off to a strong start by becoming knowledgeable about the tax breaks available for startups. Not only can startups deduct all “ordinary and necessary” business expenses, they can also write off some costs incurred before officially opening for business.
Deductible Startup Costs
The IRS tax law designates startup costs as two main types, investigative and opening business expenses. These startup costs are deductible when they result in a productive business, or can be claimed, in some cases, when the business idea falls through. Investigative costs are those incurred while researching, such as:
- Market surveys
- Labor resources
- Product review
- Potential site visits
The costs associated with opening a business include training, advertising, professional fees, and other business costs related to acquiring customers, distributors, and suppliers. Tax law does not treat equipment purchases as a deductible startup costs. Equipment items are considered assets that are written off via depreciation.
If startup costs are less than $50,000, owners can deduct up to $5,000 the first year in business. When startup costs exceed $50,000, the $5,000 deduction goes down, dollar-for-dollar, for the amount exceeded. For startup costs greater than $55,000, the $5,000 deduction is not an option.
Additional costs over $5,000 can be amortized over fifteen years. Startup owners, who do not anticipate a first year profit, may choose to select an option that will reduce taxes in profitable years.
Another option available for startup business owners is choosing to amortize startup costs over 15 years by taking the same deduction every year. Some entrepreneurs wait to recoup the tax benefits from startup costs when they sell the business.
Business Formation Costs
An additional $5,000 deduction is available for startups on behalf of specific organizational structure formation. These deductions would apply to costs incurred during the first tax year, for incorporating, forming a partnership, or forming a limited liability company. Incorporation deductions can be applied to:
- Legal fees
- State incorporation fees
- Temporary directors’ salaries
Small business owners who choose to form a partnership can deduct the following expenses, when they are related to the development of the agreement.
- Legal fees
- Accounting costs
- Filing fees
Business Deductions Overview
Startups have the ability to deduct all “ordinary and necessary” business expenses.
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