According to the IRS, there are three categories of startup expenses that are eligible for deductions: expenses for creating your business, expenses for launching your business, and expenses for organizing your business. Each category consists of a number of different types of costs, including the following:
Creating your business: These expenses include activities associated with researching your business concept and finding a proper location for your business. Expenses in this category might include consumer surveys, feasibility studies, market research, and travel expenses to potential business sites.
Launching your business: These are costs incurred while getting your business up and running and include things like recruitment and training your team, selecting vendors, advertising, and professional fees, such as our legal fees. However, you cannot include equipment purchases in your startup expense deductions, as they’re depreciated under non-startup business deduction rules.
Organizing your business: You can also write off costs associated with creating your business entity, which might include filing fees, legal fees, accounting fees, and expenses for holding organizational meetings.
How To Take Startup Deductions
Now that you understand what kind of expenses can be written off, let’s look at how to include those deductions on your federal income tax return. Although the IRS allows you to deduct certain startup expenses, there are several restrictions and limits that may apply.
The IRS does allow you to write off up to $5,000 in startup costs and another $5,000 in organizational costs in your first year of business (as opposed to amortizing the deductions over a 15-year period), but only if your total startup costs are $50,000 or less.
If your startup or organizational costs exceed $50,000, the first-year deduction cap will be reduced by the amount over $50,000. For example, if your startup expenses total $54,000, your first-year eligible deduction is reduced to just $1,000, and the rest of your expenses would need to be amortized over 15 years.
However, if your total startup costs are more than $55,000, the first-year deduction is eliminated entirely, and all of your start-up costs will be amortized.
Timing Matters
It’s often best to take the startup deductions for your business in the same year your business opens, but not always. If you won’t generate profits in your first year, it could be better to amortize your deductions over time.
Finally, if your business never gets off the ground and fails before you actually open your doors, your startup costs could be considered personal costs and wouldn’t be eligible for these deductions. In certain cases, however, these costs could be regarded as capital losses, so always consult with your CPA to ensure you’re taking advantage of every available tax break.
Maximize Your Startup Deductions
As you can see, writing off your startup costs isn’t quite as straightforward as deducting regular operating business expenses. Helping you identify and allocate your startup expenses properly is where we come in. Contact me today to schedule your appointment.
AB Law, PLLC is a full-service business law and estate planning firm that serves clients throughout Texas. All consultations are free and no question is too silly, ridiculous, or complex. https://calendly.com/ablawpllc www.ab-firm.com