What Costs Can a Startup Business Deduct?
From Business Concept to Startup
Congratulations, you are one of the brave entrepreneurs who had the guts to take a chance on themselves and their business concept to start a startup! Now you know the sheer amount of work and the rather sizable investment in startup costs that goes into starting a business (pat yourself on the back!).
You might be wondering, “Are there any startup tax deductions I can count on to mitigate my initial capital investments?” And the answer is yes! In this article, we will outline typical startup costs and the startup tax deductions available to help set yourself up for success when it comes to your first tax return.
Typical Startup Business Costs
To kick this conversation off, I think it would be helpful to do a brief rundown of the costs you can expect to cover as a startup business, to begin with, then we’ll address the associated tax deductions available to you based on this list.
Quick side note: If you’re working in a niche industry the list below is meant to be a general startup business cost overview and your list may look a little different. If you have specific questions on niche industry purchases, consulting your tax accountant is the best place to find answers. If you don’t have a tax accountant yet – don’t worry – it‘s not like you haven’t been busy building a business! Simple Startup’s tax accountants are available for support including ad-hoc consulting which can be perfect for a startup business with questions.
As a startup business owner you will likely invest in:
- Market Research. Though not all businesses partake in market research, this is often a big part of how a startup assesses and learns how to execute their business’s concept.
- Professional Services. When you first start out you may incur professional service fees for working with experts like an attorney, a consultant, and even an accountant to ensure your business and plans are legal, functional, and secure.
- Business Insurance. Business insurance works similarly to car or health insurance in that it helps minimize the financial impact on you and provides protection from lawsuits and more and will help mitigate legal fees that could accrue.
- Commercial Real Estate. Commercial real estate may include office space, production facilities, or even a warehouse depending on your industry and your initial business needs. Some businesses can even operate from a home office when they’re first starting out – cutting this cost out altogether!
- Office Supplies. You may not think so at first but purchasing Post-It notes and pens can add up over time. Add to this category an office printer and laptops and office supplies can be an expensive bucket for startup costs.
- Equipment. Equipment is necessary for most business types – think a restaurant requires kitchen equipment or a logistics company will require trucks. You can expect this category of startup costs to be very industry-dependent.
- Business Assets. This is a broad category that will include the design of your company logo as well as the development of your website and similar projects.
- Business Cards. In the beginning, you are your business’s biggest advocate when it comes to marketing, so expect to purchase business cards, so you’re prepared for every networking event and chance meeting with a future customer.
- Loan Fees. It is becoming pretty obvious there are a lot of costs involved with starting a business so it is not a surprise many owners acquire a small business loan, like an SBA loan, to launch their business. Fees and interest for these loans can be considered startup costs.
When Does a Business Start?
Another area that will need clarification before we address tax deductions is, “When does a business start?” This will play a role in the deductions you can claim on your first business tax return, so it is important to get clear on this upfront. In the eyes of the Internal Revenue Service (IRS) the business start date is the date listed on the business registration.
Startup Tax Deductions
If you’re like many folks, thinking about filing your business taxes makes you sweat – it can be stressful and the tax code is complex! There is just so much information to dig up and documentation to have handy and it is all capped off with a big SCARY deadline. Hopefully, by knowing in advance the kind of deductions available to startups will help you get your ducks in a row and mitigate the tax-time scaries.
According to the IRS, start-up costs are eligible to be taken as startup tax deductions if they fit into the categories of Creating a Business, Launching the Business, and Organization Costs (described further below). In addition, startup costs are amortizable over a 180 month (or 15 year) period if the costs meet these two criteria:
- If you paid for or incurred the cost to operate an existing active trade or business in the same field / industry as the one you entered into and,
- It is a cost you paid for or incurred before the day your active trade or business began.
Categories for Startup Tax Deductions
1) Creating a Business
For the startup businesses that took the smart route and wanted to tune into their market and business concept through research, some of those research costs can be deducted on your tax return. These costs may include market & product analysis, feasibility studies, and competitor analysis.
2) Launching the Business
This second category of startup costs is involved with literally setting up your business to operate and may include the cost to hire employees, employee training, advertising & marketing spending, professional service fees, and consultant fees.
3) Organization Costs
Organization costs include some of the more mundane but no less necessary costs of starting a business, like setting up your business entity, incorporation fees, state fees, legal fees, and the cost of meetings to complete these activities. As a note, all of these costs must be completed within the first year of business to be eligible for startup tax deductions.
Limitations on Startup Deductions
If there were no limits on startup business tax deductions then starting a business would probably not be as risky an investment as it is. So here is the ‘but’ to keep in mind when preparing to deduct away your startup expenses with glee.
As a startup entrepreneur, you can deduct up to $5,000 in business startup costs and $5,000 in business organizational costs in the year that your business launches, if your startup costs or organizational costs come in at $50,000 or less. If your startup costs or organizational costs come in at more than $50,000, your deductions will be lessened by the amount of your costs that exceeded $50,000.
However, although the bonus deduction of $5,000 can be reduced or eliminated, depending on your overall total costs, if your startup business results in an operational business, the remainder of your startup costs are amortized over a period of 180 months (or 15 years) including in year one and can elect to be deducted over this time period.
Because each business is unique and the IRS requirements and regulations are custom to each industry and may change from year to year there may be additional rules that affect your startup’s first tax return. It is important to consult your tax accountant to ensure you’re documenting and deducting the right items for YOUR tax return. Getting audited in your first year of business would be a major bummer!
How Can You Startup Strong?
You’ve committed a lot of blood, sweat, and time (maybe tears too?) to launching your startup business and we can’t underline enough that this is an accomplishment to celebrate! That being said, you may already be a little burnt out from running and growing your business to tackle your taxes too. That’s okay! Outsourcing your tax return to an accountant is a great way to get a few things off your plate, while also ensuring that you make the right decisions when it comes to your tax deductions.
We always suggest speaking with a tax accountant early on to make sure you’re fully prepared when it comes time to file your taxes with the correct documentation. We’re happy to help lighten your load by managing your tax return. Simply schedule an initial call and we’ll start by getting to know you and your business and build a customized tax plan from there.