For anyone starting a new business, the challenges they may face can seem insurmountable at times, and any offer of help is typically grabbed with both hands. While friends and family may offer to help in the form of free labor or marketing, for example, it’s generally money that entrepreneurs need the most, especially in the early days as they try to find their feet.
Fortunately, if the total cost of your start-up comes to less than $50,000, you can deduct as much as $5,000 of those costs and a further $5,000 of your organizational costs as business expenses in the year you started your business. Tax deductions for such things as costs related to market research, advertising expenses, training employees and any professional fees that may be associated with setting up the structure of your business and organization.
For tax purposes, the costs associated with setting up a start-up are usually treated as capital costs, and are considered by the IRS as being long-term assets.
Below are some of the different costs typically associated with start-ups:
- Hiring and training of employees
- Obtaining licenses and permits
- Tech expenses
- Cost of borrowing
- Advertizing and promotional costs
- New equipment and supplies
- Rental fees
- Insurance
- Costs associated with travel
- Utilities
- Legal expenses
How do the IRS categorize start-up costs that are eligible for tax deductions?
The IRS break start-up costs that are eligible for tax deductions into three categories:
- Creating a business
A lot of research needs to be carried out before starting a trade or business, and such costs as marketing, feasibility studies, product analysis, studying labor supply and so on, are all typically associated with this.
- Launching a business
Once the business or trade has been established, employees will need to be hired and trained, the services of a consultant may need to be engaged with, and there will be travel costs and fees associated with advertizing, too.
- Organization costs
When starting a business, there will be various accounting, incorporation, state and legal fees to be paid for to legalize the entity, and there may also be expenses associated with carrying out organizational meetings. Note that for these costs to be eligible for tax deductions, they must have been incurred in advance of the businesses first tax year end.
What start-up costs are not eligible for tax deductions?
An entity management firm are best placed to give you more detailed information related to tax deductions for your start-up, but as a general guide, here are some costs that aren’t eligible:
- Capital expenses, whichcan include vehicles, buildings and equipment, which for tax purposes, are considered separately.
- Expenses that are incurred by the entrepreneur before the start date of the business
- Expenses that are incurred while entering into some types of business like real estate, for example, are not eligible for tax deductions associated with a start-up.
How much are you allowed to deduct?
During the first year that your business is operational, you are permitted by the IRS to deduct start-up costs of $5,000, with an extra $5,000 permitted for organizational costs, such as those outlined previously.
Should the cost of organizing or starting up your business total more than $50,000, the first-year deductions that you’re eligible for, will be reduced by however much you exceed the $50,000 mark. Any amount remaining must be amortized.
For example, if your start-up costs are $52,000, you’ll only be able to deduct $3,000 ($5000 minus $2000) in the first year of business. The remainder is amortized.
If you’re entitled to tax deductions as a cash strapped entrepreneur, you want to know about it, right? So make sure you work alongside a qualified tax and accounting professional to get everything that you’re entitled to, and to benefit from any other advice and support they may be able to give you.